Auto trading is available for the $115/$110 Bull Put Spread at TradeMonster. We are currently working on getting auto trading set up with other brokers as well but they are not yet available.
Ben – for autotrade you instruct your broker to execute Dan’s trades on your behalf. You set the size of the trades that are on autotrade based on what funds you make available for the autotrade. Broker will be receiving same emails with trades from Dan as we do, and will automatically enter orders in your account. You seize all control of these trades to the broker – and now broker just blindly follows Dan’s emails with directions. You don’t get to choose which trades do you take or not take – everything will be executed. Advantage is that broker will lump together same trade for all subscribers, thus creating a large order, and that order will get better chance for a fill, comparing to an individual small order. Also, Dan will have means to issue more timely updates or directions on the trades mid-day that will get executed – an advantage for those members who cannot trade midday. As Gary pointed, only TradeMonster currently supports autotrade with OMM, but more is coming.
Question: So It will be a ‘sell to open’ Feb 115 put and ‘buy to close’ Feb 110 put: correct? being new to options, just want a confirmation from experienced folks.
If the trade isn’t going to expire with both legs out of the money (OTM) and you need to close it, you’ll buy to close the 115 and sell to close the 110.
Dan – our Bull Put Spread is a Credit Spread, whereas a Bull Call Spread is a debit Spread, correct? If that is the case my OptionsXpress Level 3 trade access allows Debit Spreads whereas a Credit Spread requires Level 4 or 5. I think however they will allow a paper trade.
Dan – Is it possible to state in the video, just so it is clearer for beginners like me, the specific action we take to do the trade after you tell us the strike price and if we’re selling a put, buying a put or call etc., and saying if it is sell to open, buy to close, etc. That would really help, thanks.
Dane…You are opening the trade when you start…take on risk…when you get out at gain or loss then you will be closing the trade taking off risk…You will Buy to Open the 110 and Sell to Open the 115. This is a bullish credit spread…meaning credit to you in your account…you will receive 200 dollars per contract sold and bought in the spread. So if you sell 5 contracts of the 115’s and buy 5 contracts of the 110 you will get 1,000 added to your account (less commissions of course). I would encourage you to not be doing spread trades if you are at all shakey on the basics of open-close of options positions. Entering these orders are more confusing that the standard option trades expressed so far in OMM. If you get this backwards and buy the 115 and sell the 110 then this would be a bearish strategy and you would end up with a net debit to your account. I would encourage you to spend some more time watching the training videos and would also invest in an options basics book that you can use as a reference.
Great tutorial. I have never been able to wrap my head around spreads, multi-legs, butterflies, flying wombats, and all other “complicated” options trades. This was straightforward and clear. The only area where I will need to develop the discipline and education is with the risk/return of such trades. You’ve explained it very clearly here, and that will help as a reference. The thesis makes perfect sense as well; I can imagine making such a put spread trade on other stocks that may have sold off (for example, putting on such a trade on RIG or HAL last May, after the oil mess in the Gulf of Mexico).
I also appreciate you clarifying the opportunity to specify a trade for “a net credit” – I had been wondering up to that point how you would structure such a put spread, specifying the prices of each put, and then having to wait until both were priced exactly right … and did the trade slip away before that happened.
For a spread trade many of the new members will not have authorization from their brokers to do this level of option trade. As Dan pointed out early on, you can ask for the authorization by bluffing the broker (lying) about how much option trading you have done. Just be aware that Monday morning you may not be able to place a spread trade.
There are brokers out there that do not have option levels. You may trade your account in any way that you see fit, including spreads and naked positions. Thinkorswim is the only one that I am certain about but there must be others.
I would prefer an email alert be sent when the parameters of a trade change. I’m one of those with limited free time (to wade through the forums 5.4 times per day looking for new information) but I check my email frequently for alerts.
One thing that isn’t clear to me; What happens if the price of the stock is between 115 and 110 at expiration. So, we would be obligated to buy the stock at 115, but the 110 is still out of the money and is worthless right? So would we end up buying the stock for $11,500?
Arther – EXACTLY my question, too! This question was nagging me the entire time through the video. I was waiting for a possible explanation. I have no want or need to end up with this stock at that price!
The point of the 110 Put is so you don’t end up with the stock. If the stock is just below the 115 on expiration, you are not likely (but it CAN happen) to be put the stock. If you are put the stock then your broker should automatically put the stock to someone else at 110. So you should never have to own the stock. If the stock price is between 115 and 110 on expiration you would buy back the 115 P and you will lose a little bit of your $2 profit, but you are guaranteed to not be put the stock before the expiration of the option on Saturday at noon. If the stock really drops below the 115 and doesn’t look like its going to come back before expiration, you would buy back the 115 for a loss, but hold onto the 110 just in case the stock really drops and then the 110 could be worth something making you breakeven, or even pick up a little profit.
Your maximum loss is the difference between what you are obligated to buy it at (115) and what you can sell it at (110) minus the credit you took in for doing the spread ($2).
if the stock is at 115.01 or higher, both puts expire worthless and you keep your $2.00
If the stock is at 110.99 or lower, you buy at 115, you sell at 110 losing $5, but you took in $2 to create the position, so you really only lose $3.00
If the stock is between 115 and 110, you’ll be obliged to buy it at 115, but since it’s trading above 110 in this scenario you don’t exercise your put and sell it at 110, you sell it at whatever it’s trading at. So in that case your loss is less than $3.00. Ie, if it’s trading at 114, you buy at 115, you sell at the market price of 114, losing $1, but you got $2 to create the position, so you are still up $1.00.
As Dan said in the video, your break even is 113. If it’s trading above that, you make some money (max you’ll make is $2) and if it’s trading below that you’ll lose some money (max you’ll lose is $3).
” If the stock is at 110.99 or lower, you buy at 115, you sell at 110 losing $5, but you took in $2 to create the position, so you really only lose $3.00″
should read
If the stock is at 109.99 or lower, you buy at 115, you sell at 110 losing $5, but you took in $2 to create the position, so you really only lose $3.00
Hey Dunsek, You are being so helpful in your explanations. I hope people are realizing that if they don’t understand this trade entirely, do NOT trade it. Just paper trade like Dan suggests. I have numerous accounts I manage with Scottrade. I CANNOT sell puts, even covered puts through my Scottrade Elite programs. IF I want to trade Bull Put Spreads, which I think could be quite successful, I have to open an option account with OptionsFirst with Scottrade or any of that many other option programs out there. I may opt to be part of Dan’s auto-trade when he gets that set up rather than have an additional options acct. with Scottrade. But, Dunsek, your very clear explanations seem particularly helpful when the issue of losing money confuses the strategy. Thank you!
Is this a totally stupid question? Or is it so hard no one will answer? I really don’t understand what happens if the stock falls below the first put strike price but doesn’t make it to the second put strike price. Do we have to buy the stock (Or just buy back the option which may be even more) or is there something I’m missing?
Monis, you’d still have to upgrade your level, irrespective of whether it’s autotraded or not. But we are approaching Schwab to set this up. It will be there choice…but Gary is working on it. (You may want to mention your desire to have OMM autotrading set up on your account.)
Autotrade/real time option issuance: Dan, from where I’m sitting I’d certainly vote for real time issuance of these ideas and you not waiting for after market.
People with autotrade definitely will have an advantage, but those without autotrade can still view the videos during the day. Even if your employer doesn’t allow you to access the internet for personal use, the vast majority of us have smart phones and can watch the videos on our own equipment, and if you can’t, you need a different phone!
It would be more fair to send the email out with the video first, and only submit the autotrade instructions after that email has gone out and people can review it, but no matter what you do, someone is going to complain. So with that in mind, I say real time beats after market hands down.
Dan – I agree with Dunsek’s thoughts. If you can send an email in (somewhat)real time that outlines the trade to be made that would allow most of us the opportunity to make the trade during the day – i can trade from my Blackberry if I need to.
Since everyone is throwing out their broker for autorade – mine is TOS. I know it will be impossible to include everyones broker – maybe a poll of the members would help to know which brokers to target for autotrade?
You have to place the order as a single order as Dan mentioned – sell the 115 and buy the 110 as ONE order. Place the spread order as a limit order just as with any stock trade.
I did do it as ONE order. The bid was $1.85 and the ask was at $2.00. So how does the $2.00 net credit get enforced? How do I know before hand that it is a “net credit” of $2.00 and not $1.50 or $2.50 for that matter?
If you place it as a limit order for a $2.00 credit you will only get filled for a credit of $2.00 or better. If the market maker doesn want to sell you the spread for $2.00 then your order does not get filled. The individual prices of the 115 and 110 puts may vary up and down but you will be guaranteed a minimum of $2.00 credit for the overall spread.
When you do it as one order, what you are specifying is that you will only take the trade if you get $2.00 credit or greater. What I have found, the broker may take a long time before he accepts that trade if you use the best possible prices for you. I usually go to somewhere between the mid point and the natural trade (natural trade is the worst possible trade for you). For example, I just placed the Feb 105/110 put trade (the first number is what I bought and the second number is what I sold) for .80 credit. The mid point was .82 and the natural was .78. You could start out at the mid point and, if it doesn’t get accepted within 10 to 30 min (you set the time line), you could change it towards the natural. the natural is burying at the ask and selling at the bid price of the option.
Dan, excellent explanation and reinforcement of how the put spread works, just want to applaud and encourage the repetition of key strategy explanations in your videos as it is actually quite helpful to most of us novices because it provides us that extra few seconds to digest the info, you seem to be truly in tuned to how people learn. I’m not going to trade this one because I rather use it as a learning experience for leverage next time-would definitely be interested in seeing more spreads in the future!
So, if the most we can lose on this trade is $3 per position. And we are taking in a $2 credit to start it, what is stopping me from buy 10 of them (if I have $3000 I’m willing to risk), or 100 of them if I have $30000 I’m willing to risk? Is this the only consideration or are there others I’m not seeing?
You will need $500 of buying power in your account to cover each put spread. The premium you bring in can count towards that, so in effect you have to set aside $300 cash in your account (plus the $200 you received) to cover the possible $500 loss that the put spread can incur if it goes against you.
If you want to tie up that much capital on this trade, and take the inherent risk in the trade, then go for it!!
I’d like to see a very short “blurb” on the reason for each trade. After a while, I forget why we did such trades.
Example: I think the reason for the “C” trade was because we are anticipating it going above $5; then, the big boys can start buying it. Is that true? Quick short reason: “C above $5, large house buyers come in”
AutoTrade – Gary is autotrade available? Is it available for OptionsXpress?
Auto trading is available for the $115/$110 Bull Put Spread at TradeMonster. We are currently working on getting auto trading set up with other brokers as well but they are not yet available.
What exactly is auto trade? How does it work?
Ben – for autotrade you instruct your broker to execute Dan’s trades on your behalf. You set the size of the trades that are on autotrade based on what funds you make available for the autotrade. Broker will be receiving same emails with trades from Dan as we do, and will automatically enter orders in your account. You seize all control of these trades to the broker – and now broker just blindly follows Dan’s emails with directions. You don’t get to choose which trades do you take or not take – everything will be executed. Advantage is that broker will lump together same trade for all subscribers, thus creating a large order, and that order will get better chance for a fill, comparing to an individual small order. Also, Dan will have means to issue more timely updates or directions on the trades mid-day that will get executed – an advantage for those members who cannot trade midday. As Gary pointed, only TradeMonster currently supports autotrade with OMM, but more is coming.
Gary, I have with Fidelity. Waiting for Autotrade here..
Hi Gary,
I am with Trade King and are you considering Trade King to set up Auto Trading.
Question: So It will be a ‘sell to open’ Feb 115 put and ‘buy to close’ Feb 110 put: correct? being new to options, just want a confirmation from experienced folks.
No. Both legs are opening transactions.
Sell to open the 115, buy to open the 110.
If the trade isn’t going to expire with both legs out of the money (OTM) and you need to close it, you’ll buy to close the 115 and sell to close the 110.
Dan – our Bull Put Spread is a Credit Spread, whereas a Bull Call Spread is a debit Spread, correct? If that is the case my OptionsXpress Level 3 trade access allows Debit Spreads whereas a Credit Spread requires Level 4 or 5. I think however they will allow a paper trade.
Dan – Is it possible to state in the video, just so it is clearer for beginners like me, the specific action we take to do the trade after you tell us the strike price and if we’re selling a put, buying a put or call etc., and saying if it is sell to open, buy to close, etc. That would really help, thanks.
Dane…You are opening the trade when you start…take on risk…when you get out at gain or loss then you will be closing the trade taking off risk…You will Buy to Open the 110 and Sell to Open the 115. This is a bullish credit spread…meaning credit to you in your account…you will receive 200 dollars per contract sold and bought in the spread. So if you sell 5 contracts of the 115’s and buy 5 contracts of the 110 you will get 1,000 added to your account (less commissions of course). I would encourage you to not be doing spread trades if you are at all shakey on the basics of open-close of options positions. Entering these orders are more confusing that the standard option trades expressed so far in OMM. If you get this backwards and buy the 115 and sell the 110 then this would be a bearish strategy and you would end up with a net debit to your account. I would encourage you to spend some more time watching the training videos and would also invest in an options basics book that you can use as a reference.
Great tutorial. I have never been able to wrap my head around spreads, multi-legs, butterflies, flying wombats, and all other “complicated” options trades. This was straightforward and clear. The only area where I will need to develop the discipline and education is with the risk/return of such trades. You’ve explained it very clearly here, and that will help as a reference. The thesis makes perfect sense as well; I can imagine making such a put spread trade on other stocks that may have sold off (for example, putting on such a trade on RIG or HAL last May, after the oil mess in the Gulf of Mexico).
I also appreciate you clarifying the opportunity to specify a trade for “a net credit” – I had been wondering up to that point how you would structure such a put spread, specifying the prices of each put, and then having to wait until both were priced exactly right … and did the trade slip away before that happened.
Gary, do you know what brokers you are going to be approaching for the autotrades? I am with InteractiveBrokers….what are my chances?
For a spread trade many of the new members will not have authorization from their brokers to do this level of option trade. As Dan pointed out early on, you can ask for the authorization by bluffing the broker (lying) about how much option trading you have done. Just be aware that Monday morning you may not be able to place a spread trade.
There are brokers out there that do not have option levels. You may trade your account in any way that you see fit, including spreads and naked positions. Thinkorswim is the only one that I am certain about but there must be others.
The Member Bulliten Board on the Home page stated that updates on the other open trades are on the Forum.
Cannot find these. Can anyone point to them
Thanks
I don’t find the updates on the esisting trades either?
See Gary’s post in the forum, 10:41pm Sunday Jan 30.
The updates for the other trades are in the forum. They were posted Sunday night Jan 30th by Gary at 9:41pm.
===================================
Updates on Stops
SWN, DIS and C
===================================
——————————————————
Southwestern Energy
June $37 Call: Raise stop from $2.90 to $3.20
June $39 Call: Raise Stop from $2.20 to $2.40
——————————————————
——————————————————
Citigroup
April $4.50 Call: Stop at $0.25
——————————————————
——————————————————
Disney
April $39 Call: Stop at $1.25
——————————————————
Dan/Gary,
I would prefer an email alert be sent when the parameters of a trade change. I’m one of those with limited free time (to wade through the forums 5.4 times per day looking for new information) but I check my email frequently for alerts.
Just some Beta group feedback…. Love the service.
Scott
I second that. I was lucky to run across this.
One thing that isn’t clear to me; What happens if the price of the stock is between 115 and 110 at expiration. So, we would be obligated to buy the stock at 115, but the 110 is still out of the money and is worthless right? So would we end up buying the stock for $11,500?
Arther – EXACTLY my question, too! This question was nagging me the entire time through the video. I was waiting for a possible explanation. I have no want or need to end up with this stock at that price!
The point of the 110 Put is so you don’t end up with the stock. If the stock is just below the 115 on expiration, you are not likely (but it CAN happen) to be put the stock. If you are put the stock then your broker should automatically put the stock to someone else at 110. So you should never have to own the stock. If the stock price is between 115 and 110 on expiration you would buy back the 115 P and you will lose a little bit of your $2 profit, but you are guaranteed to not be put the stock before the expiration of the option on Saturday at noon. If the stock really drops below the 115 and doesn’t look like its going to come back before expiration, you would buy back the 115 for a loss, but hold onto the 110 just in case the stock really drops and then the 110 could be worth something making you breakeven, or even pick up a little profit.
Your maximum loss is the difference between what you are obligated to buy it at (115) and what you can sell it at (110) minus the credit you took in for doing the spread ($2).
if the stock is at 115.01 or higher, both puts expire worthless and you keep your $2.00
If the stock is at 110.99 or lower, you buy at 115, you sell at 110 losing $5, but you took in $2 to create the position, so you really only lose $3.00
If the stock is between 115 and 110, you’ll be obliged to buy it at 115, but since it’s trading above 110 in this scenario you don’t exercise your put and sell it at 110, you sell it at whatever it’s trading at. So in that case your loss is less than $3.00. Ie, if it’s trading at 114, you buy at 115, you sell at the market price of 114, losing $1, but you got $2 to create the position, so you are still up $1.00.
As Dan said in the video, your break even is 113. If it’s trading above that, you make some money (max you’ll make is $2) and if it’s trading below that you’ll lose some money (max you’ll lose is $3).
D’oh- typo.”
” If the stock is at 110.99 or lower, you buy at 115, you sell at 110 losing $5, but you took in $2 to create the position, so you really only lose $3.00″
should read
If the stock is at 109.99 or lower, you buy at 115, you sell at 110 losing $5, but you took in $2 to create the position, so you really only lose $3.00
Hey Dunsek, You are being so helpful in your explanations. I hope people are realizing that if they don’t understand this trade entirely, do NOT trade it. Just paper trade like Dan suggests. I have numerous accounts I manage with Scottrade. I CANNOT sell puts, even covered puts through my Scottrade Elite programs. IF I want to trade Bull Put Spreads, which I think could be quite successful, I have to open an option account with OptionsFirst with Scottrade or any of that many other option programs out there. I may opt to be part of Dan’s auto-trade when he gets that set up rather than have an additional options acct. with Scottrade. But, Dunsek, your very clear explanations seem particularly helpful when the issue of losing money confuses the strategy. Thank you!
Is this a totally stupid question? Or is it so hard no one will answer? I really don’t understand what happens if the stock falls below the first put strike price but doesn’t make it to the second put strike price. Do we have to buy the stock (Or just buy back the option which may be even more) or is there something I’m missing?
Never mind. My browser hadn’t updated with all the answers others had given. And I think that does clear up the question I had.
Unfortunately I have to upgrade my level on Schwab before making the trade. I hope you will be able to organize autotrade with them.
Monis, you’d still have to upgrade your level, irrespective of whether it’s autotraded or not. But we are approaching Schwab to set this up. It will be there choice…but Gary is working on it. (You may want to mention your desire to have OMM autotrading set up on your account.)
Dan, Gary,
Can you also talk to Fidelity to set up auto trading?
Yes, Fidelity here as well… THANKS
I use Schwab also. Thanks for working with them. And I will mention that to them as you suggested.
Dan,
I use TOS, as I am sure many people do, so please try to include that.
Autotrade/real time option issuance: Dan, from where I’m sitting I’d certainly vote for real time issuance of these ideas and you not waiting for after market.
People with autotrade definitely will have an advantage, but those without autotrade can still view the videos during the day. Even if your employer doesn’t allow you to access the internet for personal use, the vast majority of us have smart phones and can watch the videos on our own equipment, and if you can’t, you need a different phone!
It would be more fair to send the email out with the video first, and only submit the autotrade instructions after that email has gone out and people can review it, but no matter what you do, someone is going to complain. So with that in mind, I say real time beats after market hands down.
Dan – I agree with Dunsek’s thoughts. If you can send an email in (somewhat)real time that outlines the trade to be made that would allow most of us the opportunity to make the trade during the day – i can trade from my Blackberry if I need to.
Since everyone is throwing out their broker for autorade – mine is TOS. I know it will be impossible to include everyones broker – maybe a poll of the members would help to know which brokers to target for autotrade?
How does one enforce the “Net Credit” of $2.00/share ($200.00) per contract when doing the vertical spread?
Thanks
Peter
You have to place the order as a single order as Dan mentioned – sell the 115 and buy the 110 as ONE order. Place the spread order as a limit order just as with any stock trade.
I did do it as ONE order. The bid was $1.85 and the ask was at $2.00. So how does the $2.00 net credit get enforced? How do I know before hand that it is a “net credit” of $2.00 and not $1.50 or $2.50 for that matter?
If you place it as a limit order for a $2.00 credit you will only get filled for a credit of $2.00 or better. If the market maker doesn want to sell you the spread for $2.00 then your order does not get filled. The individual prices of the 115 and 110 puts may vary up and down but you will be guaranteed a minimum of $2.00 credit for the overall spread.
When you do it as one order, what you are specifying is that you will only take the trade if you get $2.00 credit or greater. What I have found, the broker may take a long time before he accepts that trade if you use the best possible prices for you. I usually go to somewhere between the mid point and the natural trade (natural trade is the worst possible trade for you). For example, I just placed the Feb 105/110 put trade (the first number is what I bought and the second number is what I sold) for .80 credit. The mid point was .82 and the natural was .78. You could start out at the mid point and, if it doesn’t get accepted within 10 to 30 min (you set the time line), you could change it towards the natural. the natural is burying at the ask and selling at the bid price of the option.
I did not get the email for the APA trade either.
Dan, excellent explanation and reinforcement of how the put spread works, just want to applaud and encourage the repetition of key strategy explanations in your videos as it is actually quite helpful to most of us novices because it provides us that extra few seconds to digest the info, you seem to be truly in tuned to how people learn. I’m not going to trade this one because I rather use it as a learning experience for leverage next time-would definitely be interested in seeing more spreads in the future!
So, if the most we can lose on this trade is $3 per position. And we are taking in a $2 credit to start it, what is stopping me from buy 10 of them (if I have $3000 I’m willing to risk), or 100 of them if I have $30000 I’m willing to risk? Is this the only consideration or are there others I’m not seeing?
Tks.
You will need $500 of buying power in your account to cover each put spread. The premium you bring in can count towards that, so in effect you have to set aside $300 cash in your account (plus the $200 you received) to cover the possible $500 loss that the put spread can incur if it goes against you.
If you want to tie up that much capital on this trade, and take the inherent risk in the trade, then go for it!!
Scott
Dan, Should we be concerned about to many contracts? Supply and demand issues? I heard that you never want to be the biggest fish in the pond.
I’d like to see a very short “blurb” on the reason for each trade. After a while, I forget why we did such trades.
Example: I think the reason for the “C” trade was because we are anticipating it going above $5; then, the big boys can start buying it. Is that true? Quick short reason: “C above $5, large house buyers come in”
What do you think, Dan?