Sarah: “Hi everybody, this is Sarah Potter, from She Can Trade. This is the SCT Podcast, and this is episode 32. Very excited to have you all here, the markets have been moving quite a bit lately, so we’ve had a number of really nice trades in the trading room at She Can Trade. So I have TJ here :
Sarah: “And today’s topic, we’re going to talk about the differences, the advantages/disadvantages of weekly options versus monthly options. Now, you guys all know, (who’ve been following me and TJ in the trading room) that we do a lot of weekly options. We do that because they produce really great results. But we’re going to get into it in a little bit more detail today, why we do that, and what is [sic] the main differences between weeklies and monthlies. So, I think we should kind of start it all off with just kind of giving a bit of context about weekly options, and, for those of you who’ve been trading a while, weekly options is a relatively new feature for trade. I think it’s really only been around, what, three, four years? Since they really introduced weekly options. And really, it’s only been the last couple of years that it’s really gaining in popularity. What I've found is when I go and talk to different people, whether they’re from the COE, or I’m doing different talks, is a lot of professionals, a lot of them out there who will trade weekly options with their own money. I think that’s a really glaring great advantage right there, if you talk to a lot of professional people who are always making money from the market, and where they choose to put their money is in weekly options, to me is just a first advantage that’s’ very obvious as well. If they can make money, we can make money, we can all do well using weekly options. So, that’s something that I think is a pretty good advantage. And then, obviously, thinking about the fact that there’s [sic]lots of people trading it, so weekly options are quite liquid. That can sometimes be a good advantage for everybody when you’re trading; because you want to always have somebody to go back and forth with. So TJ, have you ever had that occasion where you’ve been trading in an option and the stock or the underlying might have moved in the direction you want, but the option doesn’t necessarily produce the financial results that you want?”
Sarah: “Ok, well this has happened to me, which is why I was kind of bringing it up, so sometimes when you’re getting involved in trading options that don’t have the same volume, sometimes the stocks can look so enticing on a chart, it looks really good to trade. So, I’ll go and trade the option, but sometimes I get caught in being involved in something that I’ve made a little bit of money in, but had I done something like Apple, or Facebook, or something in a weekly option, then generally I would have made more money in that stock as opposed to something that doesn’t get traded back and forth. There’s nothing more frustrating about being involved in a chart, when you see, and you look at it, and it’s taking off, but that option strike that you traded isn’t trading as much as you want. So I kind of find that weekly options, because there are lots of people trading them, make it easier to get in and out of trades.
TJ: Yeah, I think you’ve brought up a good point in that, with the popularity of weekly options, there is a ton of volume in the weeklies. You’ll almost see that in a lot of stocks, there’s as much volume in the weeklies as there is the traditional monthly expiration, in the third week of the month. Some stocks you do see a difference in open interests in volume in the monthlies, but, for a lot of the big stocks, the Amazons, the Googles, people are trading the weeklies and there is a ton of volume, there’s a ton of liquidity, you’re getting great fills in the weeklies, you’re getting all the advantages of a traditional option, but you’re able to trade those options four times a month. So, I think the discrepancy, the disparity between a weekly and a monthly expiration is that gap is narrowing, and really, we should be thinking of monthlies as just another expiration, as just another weekly expiration. Whether it’s the first week of the month or the third week of the month, that expiration for options is really all the same. Sometimes on the monthlies you’ll see a little bit of difference in terms of hitting or in terms of volatility on expiration day, just because it is traditionally the monthly expiration. You also get (on the monthlies) you’ll get contract rollover, you’ll get other types of options, not just equity options expiring as well on some of those dates. So, sometimes there is a little bit of difference but I would argue that right now, the gap between the weeklies and the monthlies is really closing and we just need to realize that yeah, you know what, we’re trading an option. Also, you know, I don’t have the stats with me, but most of the stocks on the S&P 500 right now have weekly options as well, and even now I mean if you look, we’ve started to (on the options on futures, on the cash settle indexes like the SPX) we’re now having three expiration dates per week. There’s sometimes with the SPX a Monday and a Wednesday expiration as well, so, the Exchanges have really looked to add product, and to give people really a lot of, you know, advantages of variety. What do you think the advantages of trading the weeklies are? Trading a short term? I mean, I think one of the biggest advantages for me is just how much the market is moving. I’m able to pick a smaller market trend and and trade that micro-trend that week and not have to, you know, sit through a weekend, or two weekends until the option expires.”
Sarah: “Yeah, I mean, the market likes to move, right? I’ll make money because everything goes up and down. So I think when you have more choices of when something expires, you’re able to tailor your trade a little bit more, like almost refine it more, because you can make more money in that, by getting in and out of those trades more often and looking for opportunities to really pop. Of course it depends on the strategy you’re using but rather than sitting in something, like let’s say doing a credit spread on a monthly option, which really doesn’t have the premium decay acceleration that we’re looking for, that you can really take advantage of in a weekly option, it just, to me, seems like you have far less risk. You just analyze and create the reasons for why you want to enter something like the credit spread in the first place, and then you get to place your trade and have an accelerated amount of premium decay in the weekly, as opposed to the monthly where, sure you might say ‘oh yeah, you can get more credit’, but you’re just sitting in it, like you’re just sitting there, a week, or two, and nothing’s really happening. I also think there’s a little bit more ‘give’ in a weekly option versus the monthly. So, with monthlies, let’s just talk credit spreads first : With monthlies, the credit spread has to, um, I think you have to be better at the direction, almost. You have to be pretty sure that, if you think a stock is going down, and you’re selling the call credit spread, you really need that stock to go down, because that’s where you’re going to see the premium come out and where you’re going to make some money off that trade. Versus, in the weekly option, because you already have an accelerated amount of premium decay, you can kind of be a little wrong. The stock can just stay still, and you can still make money in a short amount of time, which I think is so key. You don’t really have that advantage with monthlies. What are some advantages, you think? Let’s talk specifically in terms of strategies like credit spreads or premium time trades.”
TJ: “Yeah, as we mentioned before I think the advantage to the weeklies is just – I can get in a trade Wednesday or Thursday that expires Friday, and I can get in that trade and I can pick up, say, 30 cents a contract on a credit spread. If I go out a month, I may be able to get 50 or 60 cents, so it almost, to me, makes more sense to be in the trade a day or two, or three days, rather than three or four weeks, and do that same trade week in and week out, and even generate a little bit more in terms of, you know, if the strategy is working out and more credit – 30 cents a week times 3 or 4 weeks versus trying to get 50 or 60 cents out on the next monthly expiration. I think the advantage is that over those three weeks or four weeks that you’re trading, the market isn’t necessarily doing the same thing every week and you can tailor your trades. If I’m trading Wednesday and Friday there’s less of a chance of the market having a big move or abruptly changing direction than if I’m trading this week for three weeks out. I think we’ve seen it in the S&P, I mean everything looks great, we’re above the 21, we’re above the 8, we’re pushing higher Monday Tuesday Wednesday. Thursday we drop and Friday we drop and it’s completely changed how the market looks that week and by trading a shorter term I think we’re able to stay on the right side of the trend more often than not.”
Sarah: “Yeah, and that’s a good point too: the market has been moving around quite a bit, and you don’t want to be stuck in trades in the wrong direction. There’s not much you can do with those other than lose money. Whereas, if you’re getting in and out and actually cashing out of your trades, profiting on them and putting that money in your pocket, and then the following week you look to do it again, you can work with whatever direction the market’s moving in that week, as opposed to trying to hope that over the next few weeks or the next few months it continues to move in that direction. I think there’s far less times when you’ll open your account and you’ve seen that the trade has actually swung down into a losing position, because you’re not holding the trades as long, you don’t need to. You really get to capitalize on the moves. Now, I mean, that’s being said too: Do weekly options work when a stock underlying is moving quite a bit? So, you’re going to have, obviously more premium something as the implied volatility is higher, so things are moving around. Would there be an argument for buying calls and puts in monthlies, then, giving it a bit more time, versus the weeklies?”
TJ: “Yeah, I think there is, I think yeah absolutely. So for long puts and calls, yeah, I think you do need to give the stock time to move so I absolutely will buy it, typically buying it three to four trading weeks out, but I’m not going to be looking solely, saying, ‘okay well I can only buy an expiration of the third week of the month, the traditional monthly.’ No, I’ll be buying it, you know, maybe 3 or 4 weeks out, but the expiration will still be in a weekly option a lot of the time. I’m not focused solely on that third week of the month expiration. I’m just going to go out 3 or 4 weeks no matter where that falls. But yeah, I think definitely you do need to give trades a little bit of room when you’re trying to buy a call or a put.”
Sarah: “Yeah, I mean you do need some time, but you can still pick your weeks. And, I think the more choice you have, the better. And don’t get overwhelmed by choice, I think a lot of traders, because you do have, in options there are so many different things you can choose, make that a way to really focus on your own strategy, to make it really your own, and test the different ideas so that you’re really maximizing what you’re getting out of the market. There’s no sense in being in one stock when you can make more money in another. I would say that with weekly options, whether you want to trade it within that week or you want to go out a couple of weeks and still use the weekly option as your choice for expiry, there’s way more opportunities to tailor trades based on how you like to personalize things, how you like carry a risk, what rewards you like to work with. Regardless of whether the implied volatility is up or down, regardless of whether the market is moving or not, all of those advantages are still very relevant in weekly options. So, why not get into those and cash out of your trades more often? To me, it just makes way more sense. There’s far less risk than sitting in something and letting it go day after day, after day in the wrong direction when the market’s moving all over the place. So, I think this was a good talk and honestly, I actually believe that moving forward, we’re really not going to see new trading instruments come on, with only monthlies – I just think that weeklies is just the future. Or, it is the way that people trade now and it’s important to be able to adapt to those strategies in a modern market that we’re seeing today, because of all the advantages that we’ve outlined. So I did want to make sure that I’m mentioning in this podcast that reviews are really important and I would really appreciate if you guys enjoy the podcast, then post a review up on iTunes or any place that you like to post reviews about not only our podcast, but of course our trading room for many of you who are also members. Feedback is really important and an honest review is very helpful for everybody so I would appreciate that, if you guys could do that. Do you have any last minute words?”
TJ: “No, I think we’ve covered it! I think weeklies… the one thing that I’ll leave with is that I don’t think we should be thinking of them as weeklies and monthlies – they’re just options. Pick the expiration date that you want to trade!”
Sarah: “Good point. Alright everybody, have a great week in the market. We look forward to talking with you again. Take care!
Sarah: Hi everybody, this is Sarah Potter here for the SCT podcast, we are at episode 31 and I have TJ here.
TJ: Good morning
Sarah: And today we are going to talk about Theta, all about time and the option and how that influences it, how do we use that to our advantage and what are some things we can look for when we are trading. So, to start us off here TJ, do you want to explain to everybody just couple of sentences what is Theta.
TJ: Theta is the time value in the price of an option, so when you look at the price of an option there are two components, the intrinsic value based on the price of the stock and time value which is based on the time to expiration, so the longer an option has to expiry, the greater the percentage of time value in the price of the option, obviously the shorter the expiry, the less time value there is. So as you are holding an option, if the price of the stock doesn’t change, the price of the option will go down every day till expiry and theta is the reason the price is going down because that time value that chunk of money in the option that is based on the amount of time to expiry is decreasing. So if you have an option and price doesn’t move, that option price will go down.
Sarah: Right, yeah, remember when you are trading options, we have to deal with time as an options trader or somebody who, let’s say is buying a stock, doesn’t really have to pay as much attention to it. So certainly time is going to influence the value of that option. So there is also different ways that you can deal with it and to take advantage of it depending on what strategy you are trading. When you look at Theta, obviously you can put that on your options chain, you want to use it, at least I want to use it not necessarily to pick the strategy that I am going to use because I am generally going to make that decision based on the direction of where I think the underlying is going, but it can be very helpful with how long you want to hold an option for, so do you have any specific rules about Theta in terms of how it influences the expiries that you are trading?
TJ: Yes, absolutely. I think that we want to make a distinction about it, I really found this interesting when I first started trading options is that when you look at a textbook or when you look at an options payoff diagram, it shows that Theta expires in a nice consistent way all the way to expiry, but what I found is that the through implied volatility, the price of the options still remains high into expiration a lot of times and that will affect the premium, the time value that’s elapsed, so it’s not necessarily a linear line or a straight line of expiration, I find that, let’s talk about weekly options, that generally in time value comes out fastest usually in the last three or four days of the options life and the same thing with, if you look at monthly option, that time value is going to decrease most rapidly in really the last week or last week and a half of that option’s life. So I really like to trade weeklies, weekly options in the same week that they expire. If I am going out maybe two or three weeks, I usually like to keep it within a month, I find that if you keep it within the last month of expiry, usually the last three weeks, three or four weeks, you get the biggest bank for your buck in terms of time value expiration. If you trade an option that expires in six months, you are really not going to see a lot of time value come out of that option for the first really long time. I think that’s important to know because a lot of people try and sell options or credits spreads that are 4,5,6 months old hoping that they are going to hold this for the first three weeks and they are going to see all this time value come out, but it really doesn’t work like that.
Sarah: Yeah, I know, tell me about it, I feel like that’s pretty common that people, and sure that can work sometimes but I think the influence there if you sold a spread or you done where you have collected credit and you are just sitting on because the expiry is way far out month or two out, you have either traded something and you got the direction right but it really isn’t the difference in the option value that is changed in those periods of time when you are so far away from expiry. So I actually think that sometimes you really just become a pile on out there in the market, you really are just saying, hey guys, hey everybody, hey market makers, I am just going to stay at this stagger right here and take whatever premium and I really hope that, I hope you guys don’t know this because I am here because you just become a sitting tuck. With credit spreads once you place the trade there is isn’t any more value to that trade, so you are not making any more for holding it any longer, so sometimes they can look to really great, the whole idea of I have just taken more credit and go further out in terms of expiry but then you are just sitting there, so your money essentially isn’t working for you, you have just kind of tied it up and it’s sitting there, hoping that price doesn’t come to you. I think also, when you think about Theta decay in terms of time, its different for weekly options but then also even in terms of buying, how far out is too far out, I guess, what do you think?
TJ: It really depends, that’s a difficult question to answer, how far out is too far out, I think it really depends on your philosophy, I think it’s same as the saying, how far in the money is too far in the money, I think there is a sweet spot there as well, so for me personally I think three to four weeks what I am buying an option. I know people will buy 3,4,6 months out, I mean they offer leaps, I mean people will buy options two years out, three years out in a longer holding strategy and I have never really come to a good conclusion as to whether that is profitable on long run, what works for me is keeping it short, keeping it tight, staying within the bounds of what the market is doing right now, because as we know, in three or six months from now it could be a whole different market.
Sarah: Yeah, I think that’s a really good point. So when we are looking at multiple time frames which we both do when we are trading, it’s easier to get a kind of feel for what cycle of the market is in now, so if you think about the market moving within a year, there is going to be time where it’s going to trending really nicely, there will be other times where things are transitioning and there will be other times when the market is just not moving at all and throughout, let’s say one calendar year, you are going to have different periods of time in the market moving that way, so the further out you go in terms of the expiry or not having to deal with Theta case, let’s say you buy a call or a put, you have to keep in mind that the history that you are looking at to decide for how the market is moving now, we can gather that information, we can use the weekly charts but once you start getting out in two months out, it becomes a lot more difficult to get a feel for what cycle that market is in at that time and so, actually, I think really what you are doing is using less information with higher risk, the further out you are going because you don’t have anything, you don’t have as reliable tools to get a sense of how the market is moving.
TJ: Yeah, exactly. We spoke about that in the previous podcast as well, the illusion of credits of few months out and you get a lot more credit, but really if you look at the probability of success, it’s no more than, it could even be less than trading the current week or the next week, so it was a lot of illusion out there and you really need to understand the data or the options chain and look into, what the numbers are really, what the data is really saying, I think deltas are really quick and easy way to do that or a lot of platforms have probability of success programed in and I think those are couple of measures that people can look at to give themselves a good benchmark of yes, I am getting all those credits or yeah, the trade looks really good, I can make $20 on this option but the chances of probability of it actually working might be very low.
Sarah: And so that’s even more true, especially the closure we guess, so we both like to trade weekly options granted but let’s talk about options in terms of day trading and how Theta then becomes very important because that’s really going to influence the success of your trade and a lot of times why you might buy something and think well, this is really cheap, I am just going to buy something in the morning, I am going to try to get out of it by the end of the day and sometimes the direction might be correct but you don’t really end up with a lot of money and that really has to do with how much data is influencing the value of that option because at that time, it’s going to be much more influential. So in that respect, if you think about just Theta in terms of day trading, do you think the data hurts it too much, is there still possibilities of day trading options?
TJ: Absolutely, I think you need to look at Theta when you day trading option, you will be trading the Theta trade, so you need to be selling on a day trade, you need to be taking advantage of that rapid time decay, there is a lot of the time on Fridays the higher price stocks, virtually the entire premium that you are getting at a certain strike is time value, it’s an order the money protocol that you can sell and it’s all time value which means that, within that day the price doesn’t really move all that much, you got to collect the entire credit. I think we also have to look too is we have to look at a lot of cheaper stocks too and we have to be careful at our trading less expensive stocks and that, if you are looking at say, you may have to actually buy a put or buy a call, if you are looking at something right at the money or just slightly out of the money, that entire premium can be time decay on a lot of inexpensive options. And that can disappear very quickly with a slight change in price that’s not favorable, so we have to remember that too that if your option has a lot of time premium in it, the price moves slightly against your trade, that time value will come out very quickly.
Sarah: Yeah and so in that respect as well, theta can actually be very helpful than when you are managing trades because if you have done something like sole deed and let’s say it’s pretty close to your strike, theta can be more influential because you want to see how much time is actually embedded in the option, we are looking for that to decrease quickly, so that can be helpful tool if you are day trading, use your theta to help remembering that premium decay will go away like premium is going to happen and disappear a lot faster obviously as we get closer and closer to expiry, so that can also be very helpful with management. Are there specific numbers and levels for theta, like I don’t think I have a number that I am looking specifically for those strikes, what about you?
TJ: No, not at all, I am not looking at specific number, it’s not like delta where for example, I want to buy a put or call, you are doing to 60s or 70s, I am really not looking at theta in terms of percentage, I am just looking at it in terms of what is the price of the stock, what’s the strike price of the option and how much of the option’s price is time value, so I am looking at it kind of in a general sense and not for any specific levels.
Sarah: yeah, me too, I think it’s a good guide and remember it’s just like a slide, sliding wheel, almost like it’s going to go back and forth, then we are just looking to see how influential is it at that time, is it moving, is it changing all the time or is it pretty steady and consistent, so those numbers can be helpful when you are trying to figure out whether you are in enter trades, stay and trades or look to exit trades as well. But it is a really important thing, I think it’s kind of an underdog element to trading options it’s not always discussed but it is at the root of all of your trades because the value of what you are paying or looking for to sell is ultimately what we are doing with trading, so theta is a very important element in trading options.
TJ: That’s true, absolutely. Another thing too, that I think we can leave on this note and may be this is a great feature of podcast is option pricing models and I think we have to keep in mind too that option’s theoretical price based on model such as like black shelves or binomial pricing or any of the calculations can be different than what we are actually paying for in the market, what it’s trading for and I think a lot of times we have to understand that the price that the option is trading for in the market is based on supply demand, it’s based on market makers and traders who are going to take the other side of the trade, so sometimes the price can be different than what we think it should be.
Sarah: That is a very good point, remember, to everybody. Whatever is text book and theoretical isn’t necessarily what’s actually going on in the market. And when you are actually trading, your expertise is very valuable because actually having your money there, actually getting filled, actually exiting, actually profiting , those are the things that are really important when you trade, it doesn’t matter what it says in the textbook, it matters what you can do in the market every single day. That is an excellent theme and let’s talks about that next time. Have a great week of trading everybody and take care.
Sarah: Hi everybody this is Sarah Potter. Welcome to the SCT podcast. We are on episode 30 and I have TJ here and this is episode 30 I mean when you turn 30 years old it's kind of a big deal and I feel like you're in a new age bracket, a new category, a new box when you have to check off. I don't know, does that mean you're in a new level here for podcasts?
TJ: Yeah absolutely. I think we should have a big party for the SCT podcast, what do you think?
Sarah: Yeah way to go. Okay, so today's theme is going to be something that we kind of thought was related to being 30 and really what that has to do with is a watch list. So we're going to talk all about how to build a watch list and how to make sure you are modifying your watch list to make sure you're getting the best rates possible out there from the market. So this is kind of something that I think that maybe some people overlook. You talk about treat entries you're all people are always asking about the best strategy, what are the best stocks to trade, how do I find trades from the market but really the root of a lot of the trading and good trading comes from having a good watch list and having a watch list that you can actually find trades from and that's a big key there. You want to have a good watch list but that watch list I have to be able to produce trades for you. So it doesn't really matter how long your watch list is, you want to make sure that you can actually get some decent trades from it on a regular basis. So TJ I'm just curious, if your watch list if you're looking at some stocks, how often would you say you trade the stocks from your watch list?
TJ: Fairly often I would say that if I'm not trading a stock it probably comes off the watch list within three to six months.
Sarah: Three to six months? Okay, so how did you come up with three to six months?
TJ: I just found that if I'm not trading it and I haven't traded it, I probably won't trade it. There's a reason that something hasn't set up. I still may go back to it, may add it back you know further down the road but yeah it just comes off, I try to keep the watch list as uncluttered as possible and just that's just so you know nightly when I'm looking for trades, I can scan through in fine trades really efficiently and not spend two or three hours looking for trades but really narrow it down 15 minutes, half an hour being able to get through quickly of you. How do you build your watch list? What are your criteria?
Sarah: You know I watch this is something that I think you that gets better over time. Hence why are talking about that today, just like a good bottle of wine I think once you've been in the market for a little bit and you've kind of gone through different stocks and decided which ones you like and not, you can really start building a better and better watch list the longer you are in the market and I think you get much better at evaluating a stock to decide whether it's worthwhile. So for me the general rules are things like a high data stock. I love weekly option so you'll notice on my watch list I have basically the majority of those being stocks that have the opportunity to trade weekly options in. But really I want, we need to kind of be alive the stock so we need to be able to find trades in them. So for me if a stock doesn't work that means that's easy as well so if I place a trade in a stock an options trade and it hasn't worked out for me then it's done that a couple times and I'll get rid of it and I don't really want to look at it anymore. So for me that's something like Twitter. Twitter and I just don't get along, we just never have for some reason. I don't know why I'm very good at finding direction in a lot of different stocks but there's just some I'm not good at and one of them is Twitter, so why keep going back to a stock that I'm not that great in when I can go focus on some other stock. So stock like that, like if I don't do well in it I'm going to look to take that off my watch list and then it also has to produce trades. So if something's been sitting around on my watches for a long time and I can't really seem to ever find a good trade in it then I don't think there's really any point to reviewing that stock all the time. So for me, for some reason I have Whole Foods on my list and it's something I've had on my watch list forever and I do like to pay attention to everyone's well but I can't remember the last time I place a trade in Whole Foods, I mean I think it's been months but for some reason is still on my watch list and I still every couple of months go and check it out. So I guess that is breaking my rule a little bit but in general all the stocks are on my watch list are ones that I am going to be paying attention to and looking for opportunities. Now I also do a watch list and a short list, so every Monday I do spend some time trying to put together a bit of a stock list that I'm hoping to trade that week and we basically build that also on Tuesday in the trading room too and then generally I either scratch those off the list if they're no good or have placed a trade in them by Friday but they really need to produce and there's no point, there's opportunity cost in trading. And time is valuable, if you are trading part-time and you want the worked really hard so you can go do something else so say you're retired, if you want to have the opportunity to go do all those great things and you don't want to be sitting in front of the market. So you want to be able to have a watch list that can really produce for you so definitely ones that I will kind of go to very quickly on my watch list would be something like four spreads, like CMG, Amazon those are fantastic. I mean Amazon and Google right now they’re so high, that's a whole other podcast on their own. How to trade stocks over $1,000 now that we've got a few of them. Anyways I digress. Yeah, What are some tips you have for your watch list?
TJ: I think what you've said I think you've covered a lot of what the same thing that I look at. I have my watch list but I also have I would say I probably have 10 to 12 stocks that are my go-to stock every week and I don't see if a stock is working why I need to why I need variety. The only reason I really want to add variety is if that stock, if it doesn't trade the same anymore or if I can't you know if I can't read the stock anymore, if something changes that's when I want to remove the stock but I'm happy trading the same five, six, seven, eight stocks every week. It's not, you know I like variety in my restaurants I like variety in my wine but for stocks I mean if Google and Amazon are making you money every week, why look for something else stick with it till it stops working. I also have different categories on my watch list, obviously I'll have my watch list for credit spreads, I'll have my watch list for selling puts, covered calls, my watch list for buying and selling puts and obviously that all builds together. There's of a lot of kind of stocks that I you know that I have on there I also just kind of keeping an eye on, but traditionally every week I said it's the same 5 to 10 stocks that work, that I like and I have no issue trading the same stock over and over again. The other thing that I really like to do on my watch list is, I really focus on what I'm trading. So for me weekly you have the stocks have a weekly option, generally I'm looking for stocks that are at least a hundred dollars and more the higher the volatility, the higher the beta, the better I'm looking for stocks that that move. I'd like to make a suggestion to somebody about what to do is, is not to get caught up in suggestions that people are making or hey have you heard of this stock you know you should watch it, you can't watch all 3,000 stocks on the NYSC. You really need to break it down into a list a short list that works for you and I know what works for me might not work for somebody else. For example Apple, a lot of people love Apple, for me I kind of tend to steer clear of it. Are there any tips there that Sarah you would?
Sarah: okay, I love Apple. So Apple is something that I think if you're a beginner and I used to talk a lot about that about how I don't think apples the stock you want to get into, when you're first starting trading but it's you don't mind price fluctuating a little bit, Apple can be a really great stock to trade. So yeah I like to trade Apple. Okay, so I have to push back here a little bit because I'm a little shocked that you're saying that you only ever trade five to ten stocks and you do the same thing every week. I probably say I think you get into a pattern, so you might do those same five to 10 stocks a couple weeks and you definitely take advantage of that, you cash out of those trades you get in them again but at some point like the trend ends or the highs are hit and then you kind of have to shift gears to something else. So do you really think you only trade out of five to ten stocks?
TJ: I think it narrows down the problem to around that, I mean give or take. I'm not necessarily trading them. Yeah, absolutely they come in and out of favor every couple weeks but there's definitely my go-to stocks that I love, that I like, that over the years have just really done well and worked for me. It's like PCLN, I love PCLN, I've done really well with PCLN over the years, made a lot of great trades. Other people just don't want to go near PCLN because it is a big mover, it's a $1,900 stock, it moves a lot but if you can find some key strategies that work for you and that you know pay off, hey why not.
Sarah: Yeah you've been doing that PCLN trade quite successfully every Friday forever and that's a pretty good record. Anyhow so that's a good trade but I mean seems like MasterCard, so if you think about it a few years ago, I mean that stock was fantastic to trade spreads and we were selling that all the time and then it split us a lot cheaper now so we've had to change the strategy and so certainly MasterCard would have been something that you would have seen probably both of us trade quite a bit I know that was something we talk about all the time and really over the last couple years it's no longer that, I mean MasterCard is still fantastic to trade directionally in but it's not really something you can get credit in, right? So we does change.
TJ: It absolutely does and I think that goes to it as well as your strategies have to evolve as well as your watch list. I think you make a good point, I mean think of some really big stocks MasterCard, Apple, Netflix, those have all split and now our stocks where you really can't get any premium. I mean MasterCard was a $700 stock so with Apple and now they're trading in the hundreds. So you know you have to evolve we can't go back and keep trading if that set up or that scenario doesn't tell you isn't there anymore.
Sarah: Okay, so let's then move into like building your watch list. So for me when it's time to start if I want to add a few more stocks to the list and I'm interested in things, the things that I do that I find quite helpful is when I look on tradingview.com just to see what kind of news headlines there are, I really like to use net news headlines I know you guys have heard me talk about that before. I don't care so much about what's in the content to the article but the news headlines on market watch or any kind of website you look for, for your news, if the companies are being mentioned a lot it generally means that I want to write that stock down and I might go take a look at it. I'm never going to trade it today when there's a ton of headlines but it is something that I might add to the watch list or look to trade a week or two out. So that's something kind of how I will add the watch list and then certainly post earnings I find those are times to really refine your watch list and look to see whether there's anything you want to add or take off and that's because at earning so many sauce will have such a large move, like you said the characteristics can change. So again we take it back to that opportunity cost it doesn't really make sense to be reviewing stocks that no longer look like there's something that's going to have a trade setup in. So post earnings can be just a good time to basically look through those stocks and say alright or any of these I want to call off my watch list or you know did anything have a really big move so if you go on like the Nasdaq website or Yahoo whatever you want to use for your earnings the track when those are and you can see some of the really big ones, I mean granted that usually means there's headlines in the media as well that'll say you know whatever snap at all-time lows or whatever that happens to be and then I might just go take a look at that stock too so anytime after earning something kind of big move I will go take a look and see if there's anything I need to add to my watch list.
TJ: Yeah that's great. So I guess another question and a question I have for you too is once the stock is on your watch list, you monitor it for a while before you start trading it with real money or if there's a setup will you will you just start trading it right away?
Sarah: I would like to say that I always follow my rules and my rules would be that no. I need to wash it for a little bit and get a feel for how the stock moves especially a weekly auction, especially how that moves on Friday but if the stock has a lot of history then sometimes I will place it right now, that is not the norm so I certainly don't want everybody thinking that I just kind of go crazy on whatever stock I see. I do like to get to know stock but I mean today for example in the trading room there was sell jean I mean I haven't looked at sell jean a long time and a member brought it up and I was like, oh yeah I thought I haven't traded that in a long time and we pulled that up today and I definitely want to add that to my watch list because it does look really good right now and looks like some opportunities to trade. So sometimes you can kind of get ideas from different places and also because you've been trading for a long time and something like that is kind of gone off the cycle off the watch lists at one point or another and maybe it's time to bring it back so over the years over the long term, you basically do get to know a lot of the bigger stocks but they'll just be time so they will be on your watch list and times they won't and don't be afraid to take stocks off your list. Just because your buddy might be trading something and doing really well doesn't mean you need to do it, like I'm happy to come out and say look I don't trade Twitter, I know TJ you trade Twitter I don't trade Twitter if this is okay and I'm fine with saying you know there are some big-name stocks and stocks that people are very familiar with that I'm just not going to touch and I'm okay with that do you have any that you don't trade at all?
TJ: There's lots that I don't trade at all where do we start with popular ones or one so popular? I would say the biggest category that I stay away from financials, I think with the exception of MasterCard and Visa on occasion so financials and biotechs, I have learned that a lot of surprises in the biotech industry and you can see those 5, 10% moves happen overnight for really no reason, the other industries a lot of a lot of construction industries, mining, for example I'll avoid CAT and I'll also avoid a lot of the oil producers, refiners, drillers, I will however trade USO although, I like USO. We actually have a trade placed in USO right now. So yeah there's a lot that I have that I avoided, it's just been observation over the years that I just, how they move doesn't fit with how I trade.
Sarah: Okay, last question for this podcast. What are maybe your top five stocks that you like to trade and why that's sitting on your watch list right now?
TJ: On my watch list right now, USO, I like USO, Amazon, PCLN, Google, TSLA was a perennial favorite, it's always up there, it's always doing something, those are kind of my go to and then other than that there's a few others that that kind of creep in every once in a while but those are the main ones that I look at.
Sarah: okay, so for me Facebook has been awesome the last few months, so I've been all over Facebook. Apple, just all recently now starting to look really good. Netflix, and then yeah I mean I love Amazon and Google to for spreads those are pretty fantastic. Some stocks that I think, one sock in particular that has really changed characteristics over the last few months and if we talk about something that's on your watch list and you're treating a strategy and then it's shifted is Expedia. So Expedia has really exploded over the last few months, it's gone up in terms of price but also I think there's more people trading Expedia than ever and so before I was looking to trade I was doing credit spreads in those and trying to get into them like Monday and Tuesday because by Wednesday the premium had expired in them but over the last like two months I think it's a better candidate for and to do a whole whack load of more strategies in it I think there's more people trading it, I think it's moving really nicely, trending really well so that one is on my watch list but the way I approached that stock has shifted over the last few months too. It's been a good stock but it's definitely changed so I mean I think watch list are always evolving it's a living document and it's all it's never going to be just right you want to always be tweaking it. So I think that's probably a good tip to leave on.
TJ: yeah and if I could I guess leave a tip too is that you can get really scattered in the market because there's so many stocks and I think the traders that end up doing the best at the end of the month, at the end of the year are traders who have found stocks that they can consistently make money in and if you're constantly jumping back and forth from stocks to stock, you really aren't necessarily you know really learning how that stock moves and I think that you can add a lot to your trading by just narrowing your focus and focusing on a couple quality names especially when you first start trading.
Sarah: Those are great advice. Alright guys, happy trading. We will see you at the next podcast or of course you can always come see us trade live at www.shecantrade.com. Happy trading.
Sarah: Hi Everybody, Welcome to the SCT podcast, this is episode 29 and in today’s show what we are going to talk about is “Selling Puts”, it’s kind of a strategy that everybody seems to know about or have an understanding of how to do it but it is interesting that when you actually get into trading it, is to especially why you want to trade it, everybody has all sorts of different reasons. So, we are going to explore this strategy in today’s podcast and I have TJ here with me
Sarah: we are each going to talk a little bit about how and why did you, you will get both of our perspectives on it, so I think that should be quite helpful for everybody. So TJ can you start us off by just explaining a little bit about what is “selling a put”?
TJ: Selling a put is, your assumption is that the market is going where the stock is currently trading and hope that the stock stays at the same price or moves up by the expiration date of the option, what happens is when you sell the put, you collect the premium and if the stock price expires above the strike price of the Put, you get to keep the entire amount of the premium. Obviously if the stock price pushes down below the strike price of the put then the position begins to lose and you actually have to close out the position by buying back the Put for more than you sold it for, which creates a loss. You can also take assignment of the shares as well, if you take assignment on the short Put, you are actually long shares in your account, so there’s a few strategies there that we can use. Sarah, what market conditions do you like to sell Puts in.
Sarah: Okay, Yeah, you have actually got into strategy and just for people to summarize about what it actually is, is essentially what you are doing is trying to collect some premiums or trying to make some money by trading at a level where you don’t think that underlying is actually going to go and that’s essentially what a strategy is.
Now, people use it for all sorts of different reasons and there is some, certain times that I think is a good time to trade it and other times that I actually think is a really bad time to trade it. But I think it is really important to mention that sometimes if a strategy sounds too good to be true then you can get load into expecting a strategy like this to work a 100% of the time and it is really important that we get into this discussion about selling puts is that you, I think everyone needs to understand that this should be part of a diversified strategy in the market and if all you are ever doing is looking to just sell puts, I think that you are going to run into trades that aren’t going to work and a problem with the strategy is when it doesn’t work, it really doesn’t work and if you don’t really know how to deal with it at that point, that can really end up hurting an account.
So the first thing I guess, I want to mention is, it’s a great strategy, but it can’t be the only strategy because if all you have to do is go out and sell out puts on everything, everything will be fine until it doesn’t work out and I just want to make sure we are making that pretty clear. I think it is a nice way to collect a little bit of premium, I think what’s important though to mention because you're selling puts is it’s a small amount of money that you are taking in and you are basically taking in that amount and you really won’t make it anymore if you are just talking about purely selling a naked put. So that strategy alone when you go and look at the stock, let’s use stocks as an example, you can do it on a bunch of stuff but if you go and think ok, that underlying is going to move higher, so I just want to be able to take advantage of some premium that is sitting below the strike where it is trading and I don't really think it is going to go down there again so I am just going to trade there, then fine and certainly a stock that is trending would be a better stock to trade than naked put on rather than something that is consolidating and moving all over the place, so that will be a good time to trade it, I am assuming you follow the same kind of rule that you are going to be trading in a naked put in a trending stock.
TJ: Typically yes, yeah absolutely trading it. I also trade them in a sideways stock too, I think if you can sell naked pots outside of a consolidation range, a lot of the stocks will consolidate for a week or two or even longer and you are able to rip weekly’s, the advantage of Weekly options go in and sell that put a few times, while the stocks consolidating
Sarah: Ok yeah, that's true but why would you do a naked put on something that is consolidating instead of doing something that is a little more like an where at least at that point you are margin requirement is quite less and your risk is less. What would be the advantage of doing a naked put on something that’s moving sideways?
TJ: Well typically if a stock is moving sideways, the volatility at that point has decreased, you are not getting as much credit, so the naked put allows you to move a little bit further away from the prices currently trading, giving you and little bit of an extra buffer on one side of the trade so you can go out and you can go, maybe two or three strikes further away than if you were to do iron Condor at that then you need to get closer.
Sarah: Yeah that is true and I guess it also has to do with the account size you are trading with too because the reality is some of these naked puts are going to have pretty high margin requirement, Are they not?
TJ: That is true, but there is also, if you sort stocks by price as well, for example your radar screen and you watch list, you notice that there is an awful lot of stocks that trade below $100 and if you are trading a stock that’s $18 or $20 or $30, to sell naked puts on it the margin requirement is not that high. Absolutely, I don't sell naked puts on PCL on a $2,000 stock or on Google or on Amazon having to trading up around $1,000 right no. So yeah absolutely the margin requirement is higher. It also has to do with the volatility, so a lot of times we have to keep in perspective to that a lot of these strategies that involve selling put you sell them so and you are literally collecting pennies and for a lot of traders they are barely covering their commissions every time they sell these puts. In short enough 98% of the time, they work out what is that 2 times out of 10 or 2 times out of 20 even were it doesn't work, that ends up eating up all of your profits on those trade, so on the service I think there is a lure of easy money. But we have to look at the price of the stock and the credit you are collecting and lot of the times it’s pennies, it's pennies that you are collecting during that but trade for 3, 4 weeks maybe 5 or 6 weeks with a lot of these strategies.
Sarah: Yeah and that is exactly why I don't love selling puts and I would sometimes pick different strategies, you have actually identified it right there, is because once you get in that trade there is no possibility of making more and to me why would you sit in a trade when you are open to risk and you can’t make any more money and all you really have to do is sit there and it is almost like a pile on in the market and say "here I am I really hope you don't notice me, I can't really do anything about it but I am just going to sit here", so to me that kind of bothers me about the strategy, so certainly that’s why, I guess I will stick to trading it when there is something that has a trend because at least then I have that direction to hopefully keep price away from me because I am worried about being that pile on that's huge and everybody is going to see it and I don't really want anyone to see the trade I am in.
TJ: Absolutely, everybody thinks that, oh, the put that I have sold is far enough away, price might go through 50 Cent or $1, I will be OK but a lot of times people are trading the strategy around the wrong times. For example, earnings, so they will trade thinking that the stock might move $8, it moves 16, $8 against you and now you are way outside on this put and I think the other thing as well is that the people that sell it successfully or selling way out of the money and are adjusting there, they are adjusting a 15 Cent credit where it goes down the 12 cents they were adjusting, a very finite adjustments and I think that a lot of traders don't see that there is like the grey area that makes them work and the other thing towards the lure of profits and I think that what happens is that a lot of traders start selling them and the first bunch work out great, and then you say, well, you know what, if I am getting 15 sent successfully well here is 30 or 40 cents and now we are trying to collect 30 or 40 cents or 50 or 60 Cents on trades and it just drops the probability of success and that is going to be on one those trades where you end up getting hurt on the trade and at that point you are kind of bruised and you don't want to trade them again where it is not necessarily the strategy that didn't work but just kind of the greediness or the application of it.
Sarah: Yeah and so true to mention that when you are trading, learning textbook of what a strategy is and then actually going out and putting it on in the market can be two very different things because the theory of the strategies sounds fantastic and I think that's why a lot of people say they trade it because it’s kind of easy to get and in terms of options with all of these multi like strategies, it is pretty simple you go and look for an area where you don't think it is going and you just sell the put and hope it doesn't go down there. I mean it is a pretty simple concept in a book, but applying this and making it actually work over a long term in the market isn't as easy and I can't tell you how many times we both have had them. We had emails and discussions with people say that this is the strategy they use, this is the only one they use, this is all they do it and then you just say OK great and then what happens a couple of weeks a couple of months later is we get a horrible email from them later on, it says, Oh Man, probably I should've listened to you because the strategy isn't working for me anymore and I have taken the strategy that worked really well say 10 times, but these last couple of really wiped out all those profits in all those other ones because I was taking such small profit, I don’t know, just a word of caution. I do want to come back to something you said earlier as well which was about trading cheaper stocks, so was curious about what your opinion was. So with cheaper stock, is really selling a naked put kind of the only thing you can really do in cheaper stocks if you want to sell something.
TJ: I think it is a good strategy if you want credit. I think it is one of the few credit strategies that you could use on an inexpensive stock and I guess when I am speaking about in expensive stocks, really anything kind of under $50 I think is pretty inexpensive. Obviously other strategies that work are the tried and true but long puts, long calls debit spreads as well where you are buying but on the credit side I agree with you that it is the selling of the puts that really allows you to a little bit more flexibility.
Sarah: Yeah, as I said like it is a good strategy and there's lots of reasons and ways to place it, but it doesn't have to be the only one, so let's talk about getting out of them. So another popular way, obviously everybody just wants to sell the naked put and the trade works that you don’t have to do anything, that’s fantastic. So let's talk a little bit about when you are in the trade and you either made some profit what you do, or you are losing because it has come down to the strike you sold, what do you do, do you want to talk about some of the things you do first or do you want me to go first?
TJ: Yeah if I am trading naked puts, really the expiration is either same week, so 2 or 3 days later, trading on a Tuesday or Wednesday for Friday expiration or maybe a Thursday or Friday for the following week, I am typically not adjusting or rolling the trades there is typically not a lot a time to do that, they either work or they don't. I will just end up exiting the trade if it comes down into or close to the strike, obviously depending on, each trade is different when it comes back down into the support, support levels that I previously identified, I am most likely looking to potentially exit trade at that time and just taking a loss and moving on. I think a lot of time if you start adding and changing things, it really changes the dynamic and doesn't necessarily always work out better at the end.
And like you said in the previous podcast, most people wish they had the stock option adjustment, the redo button for adjustments that gone down this path. By the time they get to the end of this windy road, half of the time forgotten why they trade in the first place and are losing more money than they realize that they are losing. The other thing that I do frequently do, I mostly trade in selling puts because I want to own the stock, so for me if it pushes through this strike and it still again hasn’t gone through major levels of support, it still looks like a great trade something that I want to own, I will just take an assignment on this stock because it is intended into a covered call strategy or just own the stock if I want to, so for me it is really why do I get into it, most of the time I am showing that because I want to own a stock, I want to take assignment, so I am either getting it for a loss that really breaks below but if it breaks below a little bit I just pick up the stock.
Sarah: Yeah, I think that’s a good way to do it and it is a nice backup. It is always nice to have a plan B without having to adjust our role and that’s really what it is, so the same thing, when I am looking to do that, I want to take the trade and a stock that I don't mind owning the stock, sorry, does that make sense, I want to trade the option by selling and then if it doesn't work for me so if we end up having an option that has some value at that point then, I just take the stock instead and then of course you can roll out into all sorts of different trades there and you can keep making money on that. So I think that's something that’s really important and that’s absolutely kind of a great way especially when you are talking about the stock there are 50 dollars and under with that plan in mind to be able to pick up the stock, there is more room for you to deal with in terms of what account size you are trading with. So that is also something really good.
So I also just wanted to talk about, I just got out of HD today and I know that by the time you guys hear this, it will have moved on from that trade but I did just sell naked put in HD and I originally have sold it for 60 Cents and then today I got out of it and I made about half, so I think it was about $30 profit that I got out of the trade and that was only really after a couple of days and I want to mention that as well in terms of the positive side of that, so by taking it in something like 60 Cents and I can sell that back at 30 cents that is a really great return and I think it is important that we look at the percentage of return on a trade in order to decide when to get out, when it is working for me. So just because I took 60 cents, it doesn't mean I am going to hold this trade to the very end to make 60 cents. If there is a nice golden opportunity for me to get out of the trade and make $30 in a couple of days to me that makes way more sense to take the trade off and cash out and put the money in my pocket than it is to sit in it for another 2 weeks until the trade expires even if the stock are fine and I didn't really need to get out of it but to me that was just easy money to take off. So do you always hold your naked puts way till the end or do you get out of them quickly for profit I mean?
TJ: Typically I am selling them in stocks that I want to own, so the premium I am collecting, it may not at the time be enough to really make sense of selling it so I will hold them till the end. I am collecting 30 cents of premium or 40 cents right after that and I am making 7 or 8 or 12 cents on it that’s probably not enough, that is not going to be enough for me, so I will wait into expiration but absolutely if you are selling if you are able to sell that put for a 80 cents or a dollar and you can make 30 or 40 cents on it in a week or 10 days, yeah I absolutely agree and that is the thing we were talking, we did a course on Cover calls and actually a lot of it is the misconception of and I think it is the same thing with selling options is that paper profit, so for example your HD, you had 30 cents or 40 cents of potential profit in it, that's what you have today as you mentioned in 10 days who knows, that paper profit may have turned into a loss, so the only way to profit is to absolutely realize the cash out of the trade to turn that paper into paper money, like you said, I completely agree the only real profit is when you sell, so taking that 30 or 40 cents absolutely, like you said 50% profit on the trade is absolutely fantastic and it is much better to take 30 cents on the trade then in 8 days oh well you know at one time I had this paper profit, it is nice to talk about but until it's in your account it is not real.
Sarah: Absolutely, unrealized PNL is not the real thing, you want the hard cash you want that profit in your account that's really what we are all after here and that's really what we do I think really well and I think we both can give ourselves a nod here in the trading, I think we do a really great job of cashing it on the trades and profiting really nicely on the trades that we have got. So, I don't know I do think in summary that it is a good strategy I think anyone that's doing it kind of has to have the reason why and again you want to be able to build that case about why that strategy is good to trade v/s another one I think we have outlined a few of them specially in terms of determining the price of the underlying whether or not that's a strategy for you, picking whether or not you like to do it when it is trending market or consolidating. Everyone is going to have a different flavor and a different spin on it but it is the strategy that you and I both use and it can be really great.
Of course I do just wanted to throw out that the margin requirement on those are going to be different and some people depending on what kind of accounts they are trading, you might not be able to sell to do that strategy too. So, just to make sure for everybody who is listening today that you go and do that research on it as well. I don't want people getting into something without them really understanding the whole bit.
So I hope you guys found this really helpful, I think it was a good discussion, it is actually quite interesting to hear us each explain. I found it very helpful to hear TJ's perspective and how to trade the strategy. And hey, if you want to actually see us trade live in the training room, because we go through everything all the time and was another good week of trades, so I look forward to see you guys next week, please review the podcast and email podcast at shecantrade.com if you have any future ideas that you want to hear us to discuss. Happy trading, everybody.
Sarah: Hi, everybody this is Sarah Potter from the SCT podcast. We are at episode #28 and I have TJ here with me.
TJ: Hi, everyone.
Sarah: So in today’s podcast, we are going to talk specifically about adjusting, and rolling trades. Doing something with trades, if they haven’t really worked out the way you wanted them to. We’re going to talk about how and why you want to that. So first off TJ, I hope you can explain a little bit about what is the difference between using the term adjusting or rolling when it comes to trading?
TJ: Well, I think they’re pretty generic terms and different traders will use them differently. Usually for me, rolling is taking the same trade and moving it out to a different expiry date or a different strike price. Whereas, adjusting is changing the trade a little bit. So adding a leg, adding some stock to the trade, for example, to turn a short call into a covered call. Something like that where you’re changing what you’re doing, changing the intent of the trade.
Sarah: Yeah, you’re so right. I find that in trading, it’s kind of hilarious how everybody takes a different spin and take on different terms, I do find that a little interesting. I agree, so when you’re doing an adjusting and rolling, they are a different way to look at a trade but ultimately, what you’re doing is looking at an existing position that you have open, and trying to make a decision about whether or not you need to add some more risk to it to have a more favorable outcome than you have now. So TJ do you roll trades and when do you decide to do that?
TJ: Typically, I won’t generally roll a trade because most of the trades I’m doing are in weekly options and I’m only in a trade for maybe three days, four days. So we can adjust the trade or roll the trade but there’s not a lot of time to do it. So generally those weekly trades, we’ll just exit for the loss and regroup either back into an option in a few weeks once the chart pattern gets back to where we like it, for a new entry or we just get out for a loss and move on. And I think what we have to remember too and a really good point for any trader, is that no matter what you call it, adjusting or rolling. It’s placing a new trade, it’s adding risk to the trade, you’re adding an additional, potential of loss in hopes of making back what you lost on the first leg of the trade. But it is a new trade and it is adding risk so you really have to ask yourself, is that something you want to do? Is it better to take a small loss and walk away or is it better to potentially take a medium or large size loss with the hopes of winning back that initial loss. So for the short trades, no I don’t. I usually get out and move on. For some of the longer term long puts and calls, covered call position, protect puts, yes. And even if it expires three or four weeks out or longer is much easier and a much better candidate for adjusting or rolling and yes, on a case by case basis I will. I don’t think there’s any point of extending a trade for months or weeks or even a year or so just to break even at the end. I think it’s stressful mentally and stressful on your wallet a lot of times. What do you think about adjusting versus rolling do you do it? What’s your opinion Sarah?
Sarah: Well my opinion at the very beginning is I don’t ever really want to be doing that. That is never my goal in the trades and I think that is something that’s important to point out. There are strategies out there in the market that basically somebody is setting up the trade and their plan is to adjust as they move through that strategy and that’s really not something that we do in our room and I’d say that we’re both the same way that way. When we’re originally setting up our trade and deciding where we think something is going to go, choosing a strategy, the strike and the timeline accordingly, we’re looking to hit the home run. We’re looking to actually hit those targets from the beginning without having to adjust versus there are some strategies out there where when you place the trade your plan within the timeframe that you’re still in the trade is adjust the legs on either side. So we should mention that that is one strategy altogether. I don’t do that. For me if I’m going to adjust or roll a trade, I will do it occasionally. The only real times that I’m really even going to consider it is when I can still look at the underlying. I’m still going to look at a stock for example, and say yes, I still think things are moving in the same direction than I originally thought when I placed the trade. But along the way something has happened but now when I’m towards the end of the trade my assumption of where I think something is moving is still the same from the beginning I’ve just let’s say, ran out of time. So sometimes, if I still think the stock is going to be moving higher but my option is about to expire or time is influencing too much the price of the strike that I’ve purchased, I might have to roll that trade out or adjust it a little bit so that I have more time. So I will do that. I also will keep in mind how the market’s moving. So in fact if I look at my trades over the last couple of weeks, I actually have adjusted and rolled a couple. I think there’s specific links to why I’ve done each of those trades. I mean in the trading room we’ve talked specifically, because I always do that whenever we’re in trades, I always go through each one of the trades in the room and we talk about why we’re managing some, why am I exiting some, why am I taking profits here, and all that kind of things. But if I look at some of those the reason is one through earnings, so sometimes if I want to take advantage of an earnings announcement and let’s say I’m in a long position and the stock hasn’t popped out yet but I think that earnings is going to make that go a bit higher so I roll because I want to be involved a little bit longer. I will shift the trade. Again, making sure though that my assumption continues to be that I think things are going higher and so I’ll take the time and buy a little bit further out in terms of expiry to now take advantage of something like earnings. I will throw those on sometimes. And then also, if you’re in a trade, and let’s say it’s a couple of weeks out and we’re sitting in that trade and we’re waiting, and waiting and it hasn’t popped up yet but think it’s going to and all of a sudden one day there’s something that has happened that moved the market that wasn’t anticipated. So sometimes like some news events or something that has really changed the tone of the market, then I look at that stock I think okay that day alone really changed the move so let’s say it sold off quite a bit but I think it’s coming back quite strong very quickly. And so as long as the underlying assumption is still true, I still think it’s long, I will roll the trade out again. That’s an example of when I would also roll because I think again, it’s just time that I need on the trade as opposed to strategy. Now, if we talk specifically about adjusting TJ would you say you do more adjusting or rolling more often?
TJ: I do more rolling. And I agree with the premises. Usually, when I’m rolling it’s for extra time. So the stock is behaving the way that we wanted it to however the option, the expiry date that we chose is coming up really quickly. Trend is still there we just need to buy ourselves, literally, buy ourselves a little bit more time in the trade and just extend that allowing us to be in a winning trade. We’re not going to extend for time as if the chart pattern looks completely different than when we entered the trade and then a lot of people use rolling just to extend, extend, extend and kind of deny the fact that the trade’s not working but I think a lot of times it’s just like a bandaid you just have to rip it off the faster, the better and move on. Time that's a really good candidate that we've used with success. A number of times in the ETF, USO, it's a really inexpensive ETF trading anywhere right now kind of between a $9.50 and $11. You can pick up options pretty inexpensively on USO and you can look to, if USO makes a move, percentage wise you're looking to probably make 50-100% on that option's trade. So you're looking to turn that 15 cent option into a 30-40 cent option. And so in that case because you're looking for that to double or a little bit more price of the option you can afford to take that a couple of times. You can afford to adjust that trade a couple of times and still know that okay USO is in a really good trend. We just need some more time. So for example in a USO's bottoming out and I'm buying the call it slows down for a little bit and you know they say the $9 or $10 call that we have in the markets move sideway since we got into it. You know if I paid 20 cents for it, and I'm looking to get 40 or 50 cents out of it when I sell it then I can take that 20 cent trade I can take it twice and break even or more or do better on that trade. So I think there's some stocks in ETF's that really lend themselves to it and for me it is inexpensive ETF's or stocks that can move a large percentage in that USO is that one that we've adjusted with quite a bit of success.
Sarah: Yeah, you have done well with that one. So how many times would you roll something. Like at what point is it just too many times?
TJ: I think for USO I'd probably take two tries at it. Especially now, how the charts are pretty well kind of locked between that 9.50 and 11 dollar range is if you're buying a call at the bottom at 9.50 or you're buying a put up at 11, you're usually still in the same trend. So I'd be buying my call and usually what happens is it's not moving fast as we thought was going to so I'll extend it. If it reverses for example, if I've bought the call at 9.50 and then all of a sudden USO's trading at 8.75 or 8.50 I might take one more shot at it because it's just broken through support and we might get a bounce but that's about it. If the trend is changed, I'm not going to keep reversing my position on it just to kind of hold on the trade.
Sarah: Okay, I agree I usually find two rolls is really the most for me where, okay I just have got it wrong at that point. So after two times it's just I need to move on from the trade or take a sign with the stock maybe. But I have got something wrong here and it's like you said, time to pull off the bandaid. So that kind of brings me to a good question that I think people want to hear about is, when you start rolling or adjusting, whatever you're doing, are you at that point changing the goal of your trade to just break even or are you rolling and adjusting and you're still looking for a reward or profit on the trade?
TJ: Yeah, I think that's a really good point too and that I hadn't really thought of that too. And it's a lot of how I trade and what I talk about is well is that when you are the premise for me when I adjust or roll is to make back the loss. So I'm looking at if I've lost, say 30 cents on a trade, I'm looking to exit the next trade the adjusting trade at around that 30 or just a little bit more. I'm really just trying to break even, cover commissions, get out of the trade for 0. I'm not really looking on the second trade to go in and double up or triple up on that second trade and I think that's where a lot of people end up losing in adjustments because they see the profit, they've broken even and then they're trying to make money on that second trade and I think a lot of times, they're trying to make too much and it ends up retracing and they end up losing twice. So I don't know, why Sarah do you think that? why in trader's minds and I've asked myself this and I've asked room too, it never really got a great answer is, why don't people think adjusting or rolling is taking a new trade? Why do they talk about it like it's just extending in it has zero risk proposition with only gains to be had?
Sarah: You're so right actually. Sometimes I think probably because it's another term and I think we hear from brokers a lot like, let's just put out on the table that when you're all trading, were trading through brokers and what do brokers want from all of us? They want us to trade. And so sure they want to trade too, they want to make money, we want to protect our profits, we want to limit our risk, and of course everybody's looking for that one cash cow of a trade out there but we also do hear from brokers a lot that say, that explain rolling and adjusting as not necessarily a new trade but giving that first trade a second chance. And I think it actually relates to who we are as people and I just want to throw trading here on one side. Also look at everybody as a trader and the psychology of it all. I think every time any of us place a trade, we want to give things the benefit of the doubt. That it is going to work out. We all want something to be okay. We never want to set up something for failure. And I think sometimes when you're trading, it's important to be very conscious of that because when we start making those assumptions and thinking oh gosh I really hope it works out, this has to work, this has to work. We've really moved away from rational decision making that you need to make in the trade. And I think people just jump to this idea of it's okay, I can adjust. I can roll and it will just hide that and I don't have to deal with that right now. I can just move it out a little bit further. And I have to say that might be good in the short term but in the long term that can really bite you. I don't know if I'm allowed to say bite in the ass but it can really hurt you. And sometimes like you said, taking the band aid off quick or slow either way it's going to hurt. So what's the best way to actually get back on track? And sometimes because we hear from brokers about how it's okay we can hide this. It's okay, we can move on. I think people stop remembering that it actually isn't a new trade. But I like what you said, I think that's actually a good way to counterbalance that. So a solution into thinking that way is when you do start adjusting or rolling, rather than now looking for profit, is you're just really looking to break even to make back some of the loss and to cover commission. And that's another thing too here. We haven't really talked about that and ‘commissions’ can be another good podcast down the road. It's just talking about how conditions influence trading and that's another topic that we really don't hear about very often but it affects us every month and it affects our bottom line because we are all retail traders and we're paying commission. Let's mark that down as an actual theme to do cause I think that would be a good discussion. And I think that leads me into another idea that I wanted to make sure we're talking about, is that when we're adjusting and rolling, there is no undo button and I think that a lot of traders wish that once they start getting into adjusting and rolling that they're, secretly in their minds, they're thinking there's an undo button. And I would totally admit, I have trade right now that I wish there's an undo button on. So here's an example of a trade that's not working now, with you guys we're completely open and honest about trades, so here is one with DG I am in. I bought a call. It was long in position and then DG sold off. So I decided while I'm going to make an adjustment to that trade, I'm going to sell 72's and hold on to my 74 long position. So essentially creating a credit spread. And then lo and behold, what happened today DG shot up through 72. Like oh my god, man, where's my undo button? I didn't have it. So speaking of adjusting and rolling, I'm actually working on an example right now in DG and making the decision about what do I want to do moving forward. So let's take the same tips that we just discussed in the podcast and add that into this specific example. So right now when I'm in DG and the price of it is higher than the strike of which I sold. I have to make a decision about where do I think that underline is going. Where do I think that stock DG is going to move as it expires tomorrow. And so right now I'm actually holding the 72. I've been paying a lot of attention to how it's been pricing especially into this afternoon and that's really important when you're trying to decide whether to adjust or roll make sure you take good look at that options chain. Really look at and get a good feel for where is volume coming in, where are people lining up on that options chain, where do they put the stakes in the ground about where they think things are going. Use that information to help you with your trade to decide whether you want to adjust or roll. That's very helpful. And make the decision about okay I don't have an undo button here. I already adjusted the trades so I was long to 74 I added short the 72, what do I need to do now moving into tomorrow? For this specific example, in my mind tomorrow I'm going to evaluate; do I want to look to take an assignment on anything? If something has value, do I want to look for that assignment piece so I might be short in the stock if I keep this short position on or do I just want to get rid of the whole thing and say yeah, this is just a small loss and we'll just get out of it.. Do I want to get rid of just the 72's that I sold? So we're going to go through all that scenarios in the live trade room because I think that's really important. But for all of you in the podcast as well I hope you go through a same process of looking at a position you're in. Something I adjusted. I don't have an undo button. I was wrong about the direction that I thought something was moving and so as I move into tomorrow that is the end for me. I tried doing an adjustment on it. I am not going to go out any further. I confess up to it and say yup I got out of four or five winning positions this week and this one isn't working and that's okay. And I'm not going to continue the risk on this by rolling this out any further. I was wrong, I tried it once, I didn't get it so I have to make a good rational decision to say tomorrow's the end of this trade. Even though I have the ability and the broker's little light will flash and say hey you can do this. I'm not going to do that I have already made that choice one time and it's time to move on to look for other trades that can make me money. Cause I can make more money in the market being focused on the right trade rather than spending too much time on trades that are wrong. I don't know when you look at trades do you ever have a point where you're like I just have to stop here.
TJ: All the time and it's usually you try once, you try twice and then it's time to move on to something with better opportunity and not dwell or focus on the one trade or two trades of eight or two trades of ten that didn't work. Right? We're always focused on that one or two that didn't work when there's seven or eight or nine that have worked really well. But we're still well, like you said, as humans focused on that and I think, I don't know, I'd like to leave this with kind of a thought too and goes along to the last point in it. I think thought it was a really great point was if I'm taking a second. So for example, I have Apple. I take one trade, it doesn't work, I adjust it or roll it, and I'm looking at that second trade. Why does that second trade have to be an Apple? Maybe there's a better opportunity in a different stock in Google. So why do I have to stay in Apple just because I started trading in Apple? Maybe there's a better opportunity and I can make my loss back in a different stock and I think that's what we have to remember that like you said just because there is that rolling button on your brokerage that makes you that one click roll, doesn't mean you need to use it. And you need to really evaluate at the end of the day, is it better to stay in the original stock, and I think there's opportunity there. Or is there more opportunity somewhere else where I can make more money and I think that's kept me on the right side of things for many years.
Sarah: Those are wise words my friend and I'm sure all of you guys listening to this podcast can absolutely relate to this feeling because this is something that we all deal with. And I hope this has been really helpful for you to hear a little bit about how we evaluate trades and what we basically do with them when they're not working. I think it's sometimes really easy cause we are shorter term traders and we have so many profitable trades that sometimes a lot of the learning can come from trades that don’t work and so happy to talk through all of that. So great podcast today I think this was really helpful for everybody. We would love to hear from you though. So one is, send us an email email@example.com if there's a specific theme that you'd like us to talk about moving forward we're happy to take all of those pieces of feedback and then also please post a review. The reviews are what really helped build this podcast up and helped other people benefit from the learning that's here. So please review the podcast. Look forward to seeing you guys all guys next week and happy trading everybody.