Dan,
I got the trade at a net of 1.30 as specified in the parameters (2.55 and 1.25 a piece).. i had to do it in 2 seperate legs.. how do i control the sold put , do i have to buy it back at a specific point to limit losses ? Please elaborate..
Just fyi, i have Interactive Brokers and they for some reason dont let me enter two different strike prices for a put spread like this .. i am new to IB as well, so will figure it out, if someone knows it about IB then let me know, so when i did my limit order for bull spread, i put it at the price that was acceptable to me, if one leg didnt fill, i would close my position right away..I am wondering if that would be the right thing to do..
For IB you need to select the “Vertical Spread” strategy. Once selected you will notice that there is a drop down arrow next to a “Buy Combo” option, this is the default. For a bull put spread you need to click the drop down arrow and select “Sell Combo”. The you can select the correct strike prices.
Thanks Bowman, i will try that for the next bull put spread.. However ,
Now that i have them as two seperate legs, what happens on the expiry date?
will the obligation to buy at 170 be met automatically by the right to sell at 165
in case the stock falls below the 165 ? Any thing new he throws up , if you can’t
find it in time, the pricing runs away and then you do your best to use the tool you got
to meet his parameters.. I wish options were not this tight or were about less obvious
trades…most of the trades so far, we have been thinkjing about them ourselves as well..
Forget the “weekly” contracts. I know they are offered…and they are definitely cheap. But they are there for a specific reason — and we don’t trade that way. Stick with the monthly contracts. They’re more liquid and there is less stupidity baked into the bid-ask.
If anyone happens to use weekly contracts, then good for you. I support you in your use of them. But I’m not going to join you.
Certainly had no interest in a weekly, just didn’t realize this is what I had clicked on.
Mea Culpa! Thanks to Dunsek for setting me straight.
Mary says:
Fidelity has the current market spread credit of .17 on this bull put spread. But, after much searching, it looks like the price you are seeing is for the March options, not the Feb. Are you suggesting we buy the March 165/170 put spread, or is something wrong with my options pricing system, or, heaven forbid, my dense brain?
@Mary- you are looking at the weekly options expiring on Feb 4th. You want the monthlies, expiring on Feb 19th. The net credit on the Feb 170/165 bull put spread is 1.17 right now, not 0.17
Dunsek, thank you so much. Fido updated their options trading platform unbeknownst to me, so I better go back and study the way they show their strategies.
I just found a net credit of 1.12, but have put the order in as a limit trade of 1.30
If the trade works at 1.30 net credit, does it work at 1.12 also?
I am a newbie and need help (clarification) on this trade.
1) Do we sell to open or sell to close? Do we buy to open or buy to close?
2) How is the Net Credit actually calculated.
First thought — do not enter the trades as two different of sequential trades. One leg CAN run away on its own before you get the chace to fill both legs of the trade. It is important to enter these trades as ONE TRADE in the form of a spread.
I use ETrade and I think other online brokers work the same.
You should be able to enter the “option” order in as a “spread”
When you open the Spread window, you enter the underlying (AMZN) and then enter the Buy leg first in the window and then enter the sell leg in the same window and then you select type of order as a “limit” order and then you select “net credit” for this type of spread. That is where you will put 1.30 for this trade. Right now, the net credit is about 1.10, so you will have to wait for it to fill, assuming it ever does.
One other note, there are 4 levels of option trading privileges from basic to (1) to speculative (4).
If you only have level one option privileges, you might not be granted access to the “Spread” order form. You probably are granted access to it, but if you don’t have level 2 or higher privileges, your broker will not accept your trade.
You are “opening” a trade. There is nothing to close.
You are “selling” this credit spread. Remember — you bring in money when you sell. You spend money when you buy.
This is a credit spread (I explained in the video that you’ll be taking money in on this trade).
Hope this helps.
Dan
(By the way, the question is understandable. If you’re new to options, it’ll take you a while to get the nomenclature down. When in doubt, get a broker on the phone and have them walk you through it. Make them earn their money.)
You enter this as a spread, but you also enter the buy order first and the sell order second. You are opening the trade so they would both be buy to open.
I think when u enter into a contract must be open (You are opening the contract) so must be buy to open and sell to open, watch Dan’s tutorial vedio it helps a lot.
I cannot trade spreads on Ameritrade yet. Is what Rahul Toley did an acceptable way of trading this. Also, is this a trade that has to be done today or can it be done tomorrow.? I didn’t understand what that “Day Limit’ meant exactly.
I have optionsxpress Brokers,I can’t enter two different strike prices for a put spread like this .. I am new to spread, can you please help me how to enter a order.(I entered1st Amzn Feb 165 put – buy to open and 2nd Amzn Feb 170 put -sell to open) (then I have Market, Limit/Credit, Limit/Credit, Even- where do I enter?)
This may be like the blind leading the blind but if you look under your trade tab you will find Xspreads. there you will find a whole new can of worms. If you realy want to do the trade just call them and describe the trade you want. Hope this helps.
KK, I had to speak to the Options Express brokers. You must request an upgrade to level 4 trading and change your profile under investment objective to “aggressive growth”. After a few minutes I was able to enter the trade
I use OX and they make this very easy to do. When you are looking at an options chain, in the upper panel where you input the symbol and range and type; click in the type box and select put spread or call spread or whatever and then options will be paired for you and show the net credit (bid) or debt (ask) for the spread pair. Simply click on the pair you want to trade and the trade screens will load the correct options for you and all you have to do is select the number of contracts for each leg and hit the preview order button.
Can someone confirm my understanding of this trade? : I will never have to purchase the actual stock (don’t have the liquidity right now), even if AMZN falls below 170 and above 165, because the purchase of the 165 put will protect me against having to do that. In such a scenario, I would lose a small amount, but never have to actually buy the stock. The Bull Put Spread protects me from having to do that. Is that right? I’d like to try this Thursday.
Just make sure you call your broker on expiration day if you still have the spread or simply place an order to close it to make sure you’re not stuck with stock. I’m sure your Broker will give you a friendly reminder on expiration day to take care of it if you are at risk of being put stock without enough cash. They don’t like that! Good luck.
frisrael@verizon.net,
It is possible you would have to buy the stock @ $170.00/sh if it is above $165 and below $170. This is because you can get assigned on the short $170 PUT at ANYTIME…sometimes people will exercise a PUT before expiration for various reasons, the options clearing house then randomly assigns that to someone who is short the $170 PUT. All you have to do is immediately sell the stock at a loss, your loss will be somewhere between $0.01 and $5.00 per share (not factoring the credit you received for selling the PUT Spread…It’s also technically possible for the stock to rally above $170 before you sell and then you would make a profit on the sale of the stock also).
If your account doesn’t have enough cash to cover the purchase of the stock @ $170.00/sh ($17,000 per PUT contract assigned to you) then the broker will either issue a margin call or they will immediately liquidate (Sell) the AMZN stock when the market opens at the market price.
Don’t let the risk of assignment scare you.
It really isn’t that bad once you know how things work and what to do if it happens. The first time it happened to me I about had a heart attack! I had sold a Bull Put Spread similar to this one, the stock was trading about $0.50 below the PUT I was short with about 2 weeks till expiration. I logged into my account one morning and found my balance was thousands below zero! I didn’t know what to do…I called my broker before the market opened an they said not to worry they would automatically sell the stock that I had been assigned with, when the market opened. A couple minutes after the opening bell my account balance was positive again. I actually made a nice profit because I had collected a credit when selling the Bull Put Spread, plus the stock Gaped Up that morning and the market order filled above the price I had bought (been assigned) the stock at.
So to sum it up, as long as you own the $165 PUT also, the most you can loose is $370 per spread you sell ($500 risk minus $130 credit from selling the bull put spread)…even if you were to get assigned on the Short $170 PUT between now and when it expires…your account balance will just briefly look bad until you/your broker close the position you got assigned on.
Do I have this right. To determin the credit you take the difference between the two bids? the market is closed now and I come up with 1.24 Hope this makes sence…..Bill
Dan, one suggestion; Some of us, like myself, are not geniuses with arithmetic and such. When you talk about some of the numbers and percentages it would help (at least me and maybe others) if you explain a bit on how you arrived at that number and why it is important. It would really help me understand your videos even more.
The numbers come by subtracting the $170 bid price from the $165 ask price. It should be $1.30 or higher. Subtract that from the difference of the strike prices ($170-$165) $5 – $1.30 = $3.70
Max Profit = $130 per contract
Max Loss = $370 per contract
To figure your return % divide your profit by what you spent…or in this case your potential profit by your potential loss.
I put my order in on this trade through Fidelity around 12:45PM EST today right after Dan posted. No trigger yet. Would I have been triggered if I had autotraded? If so, any luck with bringing Fidelity on board or should I switch brokers?
Yes you would have been filled if autotraded…when Dan put the trade out it was trading at better than the credit he gave so you would have been filled right away.
Autotraders at TradeMonster were filled right away. I was filled without autotrading.
I’m not a big Fidelity fan. In my personal experience (and yours may certainly vary), I have received poor fills on trades, and have also been charged a pretty penny in commissions for the privilege of getting crappy fills.
I no longer trade with them. Again, YOUR experience may vary. I am really super picky and intolerant of broker/fill issues because I do this for a living. I watch trading costs such as commissions and slippage with a critical eye.
Thanks Dan – your opinion is much appreciated – I don’t have an inside perspective into the business, I know you like the Najarians, and they sound more attractive than Flunkelity. However, I have found Interactive Brokers to be enticing with their margin rates and options trading platform, although I do not have an account yet. What’s the skinny on the margin advantages over the monster?
Say on this bull put spread if you are selling a put, doesn’t you broker require you to have the funds available in case the stock gets put to you, can someone explain this?
thanks
You are also buying a put at a lower strike, which limits your potential liability from $17,000 down to $500 (17000-16500). Your broker will require you to have $500 – $130 = $370 per contact in your account.
Hey dan, these trading tips are great, however, what about those of us who are not ready to assume this level of option trading? Are you planning on also providing regular call and put recommendations or will these count as our trading ideas for the week?
I think some of us may need advice on a broker for options. My account can do options but I cannot do a sell to open on a put. These Bull Put spreads are something I cannot do with my present accounts.
Check out TradeMonster.com. You can autotrade there. Another option is OptionsXpress, which should enable you to autotrade here as well (though we have not yet gotten approval from them). Only OM and OX seem to be set up for autotrading. Fidelity certainly doesn’t, nor do the other brokers who Gary has contacted.
That’s really the only advice I can give you, though members in the Community Forum might have some ideas.
I have been with OptionsXpress since 2003 and for the most part I have been very happy…they have lots of educational tools and have done a great job of making options order entry very easy. Commission on options trades are a little more than some but I have never had a bad fill and in some cases I have had my limit orders filled better than the limit. They offer no fee IRA’s as well and you can trade spreads in the IRA accounts. I have looked at other platforms and until I am ready to do this full time with a direct access broker…I just have not found an alternative worth leaving for.
With this trade you will not have to buy the stock to fulfill the put you sold. The put you bought will cover that. You will have to have the cash difference available or margin available to cover 170-165=5-1.30=3.70*100=$370/contract this is the maximum extent of your potential loss. The maximum potential gain is 1.30*100=130 per contract. Since you are risking 370 for potential gain of 130 or essentially a 130/370=circa 35% return. Make sure to trade Feb19 calls and not the Feb 4 calls.
Dan: You are the most talented teacher with the absolute best approach to risk management out there. Thank you for this wonderful opportunity. I would not be learning about options if not for OMM. They just seemed to scary … until now. BRAVO!
Dan: You are the most talented teacher with the absolute best approach to risk management out there. Thank you for this wonderful opportunity. I would not be learning about options if not for OMM. They just seemed too scary … until now. BRAVO!
Thank you, Pard! I do appreciate that. Teaching others to trade successfully is a higher calling than trading successfully myself. The latter is a prerequisite for the former…so I’m lucky enough to be able to do what I love for a living. :o)
@ Kenenth- if the market price is above 170, you keep your $1.30 premium. Life is good.
If the market price is below 170 but above your break even of 168.70 (assuming you got a 1.30 credit) then you get assigned on the 170s, sell the stock in the market and make some money; Life is less good.
If the market price is below 168.70 but above 165 you get assigned on the 170s, sell the stock into the market and lose a bit of money. That’s unfortunate.
If the market price is below 165 you get assigned on (and buy at) the 170s, exercise (and sell at) the 165s and you lose the $5 difference between the strike prices, less the premium you brought in, so you lose $5-$1.30, or $3.70. Good thing we capped the downside rather than just selling the 170 put.
Dunsek – Just so I understand, will I have to execute a “sell to close” the $165 put if the stock price is below $170 at expiration or does the broker close this out for me?
Paul,
The only time you will “Sell To Close” the $165 PUT is if you want to get out of the trade before expiration.
You would want to do it as a single trade (“Buy to Close” the $170 PUT AND “Sell to Close” the $165 PUT at the same time).
Otherwise, if you just “Sell To Close” the $165 PUT you will end up with a NAKED SHORT Position on the $170 PUT, which is very risky because you have to buy the stock at $170.00 if the market price is below $170.00 on expiration (even if it goes $0.00 ie: bankrupt company). That is technically up to $17,000 of risk for each $170 PUT you are short.
If you don’t exit the trade before expiration then 1 of the following 3 scenarios will play out:
1. If the $165 PUT is In The Money (ITM) (meaning the stock price is $164.99 or lower) come expiration date Feb 19th, your broker should automatically exercise it. (Be sure to verify with this with your broker, since it’s possible your firm has different rules). You will also be assigned on the $170 PUT in this instance, but this should all be pretty transparent to you. If you sold a 1 of the above Bull PUT Spreads, You will see in your account log after Feb, 19th where you bought 100 shares of AMZN @ $170 (you were assigned on the $170 PUT), then sold 100 shares of AMZN @ $165 (your broker exercised your $165 PUT). So you would have a loss of $500 from the stock, but you took in a credit of $130 when you sold the PUT spread so the Net Loss is $370.
2. If the $165 PUT is out of the money (OTM) (meaning the stock price is $165.00 or higher) come expiration date Feb 19th, your $165 PUT option will simply expire worthless and disappear from your account. If the stock is above $165.00 but lower than $170.00 then you will be assigned on the $170 PUT and when you log into your account after Feb, 19th you will find you now own 100 shares of AMZN for each $170 PUT you sold in the above spread. Your account will show that you bought the 100 shares @ $170.00 even if the market price is less than that. You can then sell the 100 shares of AMZN at a loss, or hold it if you are bullish. NOTE: Your broker may issue a margin call or simply sell the AMZN stock position for you with a market order if owning these 100 shares causes you to exceed your margin limits.
3. If both the $165 and $170 PUT are out of the money (OTM) (Meaning the stock price is $170 or higher) come expiration date Feb 19th, both the $165 and $170 PUT’s will expire. There is no action needed on your part they will just be gone from your account and you are left with the $130 credit you received when you sold the spread. You have a Net Profit of $130
—–
Paul, does that clear up your question or did I confuse you further?
Shawn – Excellent explanation, much clearer and very much appreciated. Thank you.
I understand the theory behind all that Dan is doing. I have experience with call/put writing. However, the bull put spread is something new and a strategy that I frankly was missing until now. it is the actual mechanics of the trade at expiration if AMZN was below $170 but above $165 that had me confused. Your explanation has cleared that up. Again, thanks.
KENNETH YOUNG says:
dunsek many thanks for clearing some of the fog . Does the 1.30 credit arise from the different price of the respective put options.-if so I believe i see the outline of the road ahead – aka hedging or insurance against a possible fall in market price
Thanks Dan and everyone on the forum. With what Dan shared and then mixed with the comments from the experienced investors I am learning, on paper trading 🙂 I would not be dong options, if it was not on a forum that I trusted and felt safe on. Thanks Dan and the OMM team and all you guys how post.
Charles — you are a prudent man! Congratulations, my friend. You are respecting your money…an essential characteristic of successful traders, and a missing characteristic of every single failed trader I have ever met.
Do I place order using Feb 11th for both strike prices. One choice it gives me is Feb11th for 170 and Feb 4th for 165 part. My instincts tell me to put Feb 11th for both. Veronica.
I know from listening to your great videos on SMM that you are a great teacher. But I am totally new to options (as I wrote to you earlier, I would not even have thought of options if it were not your guidance). I have to say that your explanations are pure Chinese to me. This is no doubt my ignorance. But I would appreciate if you could please advise me how to get started understanding the trades.
Stephane…If you have not watched the videos in the education section then you need to do that first….and then you need to watch the again…and again…until the light goes on…if the video’s don’t get you then go buy a book on the basic of options and do some self study…There are a ton of books on Amazon…I would be willing to be that a couple trips through the education video and reading one book on basics of options your understanding of Chineese will improve dramatically.
Just wanted to let everyone know that I was able to get a fill today on AMZN bull put spread for net credit of 1.30! With only a couple of weeks left before options expiration I think we all have a great chance of staying OTM on the short put. Can anybody who understands the Greeks well explain to all of us how theta and delta affect the value of a bull put spread and what is profitable and not. For instance today on AMZN Delta is 15.07 and Theta is +11.36 using TOS. I know different brokerages use different value representations but I believe this indicates dollar values in TOS. Not sure how to interpret it though. Since AMZN is trading at $118.32 today does that mean that the option spread as a unit lost $11.36 today in value? Since the primary options instrument is the short which we want to stay out of the money and decrease in value to nothing, does this mean a positive value in Theta on a daily basis is good or what? Can some of you long time options pros help us beginners out here?
Dan, could you please specify the type of order clearly like Buy To Open or Sell to Close instead of just saying Buy or Sell? I really appreciate it. Thanks
@Bhaskar- have you watched the Open and Close tutorial in the Education->Option Video Tutorials section?
Buying to open is just buying something new. Buying to close is buying back something you already sold short
Selling to open is the same as short selling, and Selling to close is just selling something you own.
Watch that video. Dan’s explanation using ‘the door to the risk room’ is really clear.
Dan This viedo was done so well I had an epiphany and now understand the relationship of strike prices to time decay. Thank you. Options are so hard but when yoou get it you want to smack yourself on the head because it was so obvious.
the 170/165 put spread is more like a .30 or .35 credit. Or did you mean 175/165?
Dan,
I got the trade at a net of 1.30 as specified in the parameters (2.55 and 1.25 a piece).. i had to do it in 2 seperate legs.. how do i control the sold put , do i have to buy it back at a specific point to limit losses ? Please elaborate..
Thanks
Rahul.
Just fyi, i have Interactive Brokers and they for some reason dont let me enter two different strike prices for a put spread like this .. i am new to IB as well, so will figure it out, if someone knows it about IB then let me know, so when i did my limit order for bull spread, i put it at the price that was acceptable to me, if one leg didnt fill, i would close my position right away..I am wondering if that would be the right thing to do..
For IB you need to select the “Vertical Spread” strategy. Once selected you will notice that there is a drop down arrow next to a “Buy Combo” option, this is the default. For a bull put spread you need to click the drop down arrow and select “Sell Combo”. The you can select the correct strike prices.
Thanks Bowman, i will try that for the next bull put spread.. However ,
Now that i have them as two seperate legs, what happens on the expiry date?
will the obligation to buy at 170 be met automatically by the right to sell at 165
in case the stock falls below the 165 ? Any thing new he throws up , if you can’t
find it in time, the pricing runs away and then you do your best to use the tool you got
to meet his parameters.. I wish options were not this tight or were about less obvious
trades…most of the trades so far, we have been thinkjing about them ourselves as well..
Arthur Hopefully you are looking at Feb 19 puts.
The february 4 puts look more like the price you posted but that is not the trade.
Yes, you are right. I am still not used to seeing weekly put quotes in tdameritrade. Thanks.
Forget the “weekly” contracts. I know they are offered…and they are definitely cheap. But they are there for a specific reason — and we don’t trade that way. Stick with the monthly contracts. They’re more liquid and there is less stupidity baked into the bid-ask.
If anyone happens to use weekly contracts, then good for you. I support you in your use of them. But I’m not going to join you.
Certainly had no interest in a weekly, just didn’t realize this is what I had clicked on.
Mea Culpa! Thanks to Dunsek for setting me straight.
Fidelity has the current market spread credit of .17 on this bull put spread. But, after much searching, it looks like the price you are seeing is for the March options, not the Feb. Are you suggesting we buy the March 165/170 put spread, or is something wrong with my options pricing system, or, heaven forbid, my dense brain?
@Mary- you are looking at the weekly options expiring on Feb 4th. You want the monthlies, expiring on Feb 19th. The net credit on the Feb 170/165 bull put spread is 1.17 right now, not 0.17
Dunsek, thank you so much. Fido updated their options trading platform unbeknownst to me, so I better go back and study the way they show their strategies.
Mary,
what are you using to get you pricing credit? thanks
i appreciate how you send the trade intraday first so we can get the trade in and then the video later- makes sense!
PERFECT!
I just found a net credit of 1.12, but have put the order in as a limit trade of 1.30
If the trade works at 1.30 net credit, does it work at 1.12 also?
I have had my trade order in at a net credit of $1.30 but have not received a fill yet on the trade. We’ll see what happens.
I am a newbie and need help (clarification) on this trade.
1) Do we sell to open or sell to close? Do we buy to open or buy to close?
2) How is the Net Credit actually calculated.
Thanks for any help!
Valerie
First thought — do not enter the trades as two different of sequential trades. One leg CAN run away on its own before you get the chace to fill both legs of the trade. It is important to enter these trades as ONE TRADE in the form of a spread.
I use ETrade and I think other online brokers work the same.
You should be able to enter the “option” order in as a “spread”
When you open the Spread window, you enter the underlying (AMZN) and then enter the Buy leg first in the window and then enter the sell leg in the same window and then you select type of order as a “limit” order and then you select “net credit” for this type of spread. That is where you will put 1.30 for this trade. Right now, the net credit is about 1.10, so you will have to wait for it to fill, assuming it ever does.
One other note, there are 4 levels of option trading privileges from basic to (1) to speculative (4).
If you only have level one option privileges, you might not be granted access to the “Spread” order form. You probably are granted access to it, but if you don’t have level 2 or higher privileges, your broker will not accept your trade.
You are “opening” a trade. There is nothing to close.
You are “selling” this credit spread. Remember — you bring in money when you sell. You spend money when you buy.
This is a credit spread (I explained in the video that you’ll be taking money in on this trade).
Hope this helps.
Dan
(By the way, the question is understandable. If you’re new to options, it’ll take you a while to get the nomenclature down. When in doubt, get a broker on the phone and have them walk you through it. Make them earn their money.)
You enter this as a spread, but you also enter the buy order first and the sell order second. You are opening the trade so they would both be buy to open.
I think when u enter into a contract must be open (You are opening the contract) so must be buy to open and sell to open, watch Dan’s tutorial vedio it helps a lot.
I cannot trade spreads on Ameritrade yet. Is what Rahul Toley did an acceptable way of trading this. Also, is this a trade that has to be done today or can it be done tomorrow.? I didn’t understand what that “Day Limit’ meant exactly.
Spread is at 1.32 NOW! Using power etrade and the spread order.
If it’s at $1.32, I don’t get it because I didn’t get a fill on my order at $1.30! Oh well, maybe tomorrow
Question for the experienced investors: (I am still learning) In case the stock start going down, when/price one should put the stop loss?
can we do the trade tomorrow… missed it today….. best… marc
I have optionsxpress Brokers,I can’t enter two different strike prices for a put spread like this .. I am new to spread, can you please help me how to enter a order.(I entered1st Amzn Feb 165 put – buy to open and 2nd Amzn Feb 170 put -sell to open) (then I have Market, Limit/Credit, Limit/Credit, Even- where do I enter?)
This may be like the blind leading the blind but if you look under your trade tab you will find Xspreads. there you will find a whole new can of worms. If you realy want to do the trade just call them and describe the trade you want. Hope this helps.
KK, I had to speak to the Options Express brokers. You must request an upgrade to level 4 trading and change your profile under investment objective to “aggressive growth”. After a few minutes I was able to enter the trade
I use OX and they make this very easy to do. When you are looking at an options chain, in the upper panel where you input the symbol and range and type; click in the type box and select put spread or call spread or whatever and then options will be paired for you and show the net credit (bid) or debt (ask) for the spread pair. Simply click on the pair you want to trade and the trade screens will load the correct options for you and all you have to do is select the number of contracts for each leg and hit the preview order button.
Can someone confirm my understanding of this trade? : I will never have to purchase the actual stock (don’t have the liquidity right now), even if AMZN falls below 170 and above 165, because the purchase of the 165 put will protect me against having to do that. In such a scenario, I would lose a small amount, but never have to actually buy the stock. The Bull Put Spread protects me from having to do that. Is that right? I’d like to try this Thursday.
Just make sure you call your broker on expiration day if you still have the spread or simply place an order to close it to make sure you’re not stuck with stock. I’m sure your Broker will give you a friendly reminder on expiration day to take care of it if you are at risk of being put stock without enough cash. They don’t like that! Good luck.
frisrael@verizon.net,
It is possible you would have to buy the stock @ $170.00/sh if it is above $165 and below $170. This is because you can get assigned on the short $170 PUT at ANYTIME…sometimes people will exercise a PUT before expiration for various reasons, the options clearing house then randomly assigns that to someone who is short the $170 PUT. All you have to do is immediately sell the stock at a loss, your loss will be somewhere between $0.01 and $5.00 per share (not factoring the credit you received for selling the PUT Spread…It’s also technically possible for the stock to rally above $170 before you sell and then you would make a profit on the sale of the stock also).
If your account doesn’t have enough cash to cover the purchase of the stock @ $170.00/sh ($17,000 per PUT contract assigned to you) then the broker will either issue a margin call or they will immediately liquidate (Sell) the AMZN stock when the market opens at the market price.
Don’t let the risk of assignment scare you.
It really isn’t that bad once you know how things work and what to do if it happens. The first time it happened to me I about had a heart attack! I had sold a Bull Put Spread similar to this one, the stock was trading about $0.50 below the PUT I was short with about 2 weeks till expiration. I logged into my account one morning and found my balance was thousands below zero! I didn’t know what to do…I called my broker before the market opened an they said not to worry they would automatically sell the stock that I had been assigned with, when the market opened. A couple minutes after the opening bell my account balance was positive again. I actually made a nice profit because I had collected a credit when selling the Bull Put Spread, plus the stock Gaped Up that morning and the market order filled above the price I had bought (been assigned) the stock at.
So to sum it up, as long as you own the $165 PUT also, the most you can loose is $370 per spread you sell ($500 risk minus $130 credit from selling the bull put spread)…even if you were to get assigned on the Short $170 PUT between now and when it expires…your account balance will just briefly look bad until you/your broker close the position you got assigned on.
Do I have this right. To determin the credit you take the difference between the two bids? the market is closed now and I come up with 1.24 Hope this makes sence…..Bill
No…you take the differance between the ask of the contract you are buying and the bid of the contract you are selling.
Dan, one suggestion; Some of us, like myself, are not geniuses with arithmetic and such. When you talk about some of the numbers and percentages it would help (at least me and maybe others) if you explain a bit on how you arrived at that number and why it is important. It would really help me understand your videos even more.
Thanks!
The numbers come by subtracting the $170 bid price from the $165 ask price. It should be $1.30 or higher. Subtract that from the difference of the strike prices ($170-$165) $5 – $1.30 = $3.70
Max Profit = $130 per contract
Max Loss = $370 per contract
To figure your return % divide your profit by what you spent…or in this case your potential profit by your potential loss.
1.30/3.70 = 0.351 or 35%
Exelent! thank you all so much.
I put my order in on this trade through Fidelity around 12:45PM EST today right after Dan posted. No trigger yet. Would I have been triggered if I had autotraded? If so, any luck with bringing Fidelity on board or should I switch brokers?
Yes you would have been filled if autotraded…when Dan put the trade out it was trading at better than the credit he gave so you would have been filled right away.
Autotraders at TradeMonster were filled right away. I was filled without autotrading.
I’m not a big Fidelity fan. In my personal experience (and yours may certainly vary), I have received poor fills on trades, and have also been charged a pretty penny in commissions for the privilege of getting crappy fills.
I no longer trade with them. Again, YOUR experience may vary. I am really super picky and intolerant of broker/fill issues because I do this for a living. I watch trading costs such as commissions and slippage with a critical eye.
Dan
That is who I am with and your dead on. I have just about had it with Fidelity.
Thanks Dan – your opinion is much appreciated – I don’t have an inside perspective into the business, I know you like the Najarians, and they sound more attractive than Flunkelity. However, I have found Interactive Brokers to be enticing with their margin rates and options trading platform, although I do not have an account yet. What’s the skinny on the margin advantages over the monster?
Say on this bull put spread if you are selling a put, doesn’t you broker require you to have the funds available in case the stock gets put to you, can someone explain this?
thanks
You are also buying a put at a lower strike, which limits your potential liability from $17,000 down to $500 (17000-16500). Your broker will require you to have $500 – $130 = $370 per contact in your account.
ooooh i like how u explained that!
Hey dan, these trading tips are great, however, what about those of us who are not ready to assume this level of option trading? Are you planning on also providing regular call and put recommendations or will these count as our trading ideas for the week?
Hi Dan,
I think some of us may need advice on a broker for options. My account can do options but I cannot do a sell to open on a put. These Bull Put spreads are something I cannot do with my present accounts.
Check out TradeMonster.com. You can autotrade there. Another option is OptionsXpress, which should enable you to autotrade here as well (though we have not yet gotten approval from them). Only OM and OX seem to be set up for autotrading. Fidelity certainly doesn’t, nor do the other brokers who Gary has contacted.
That’s really the only advice I can give you, though members in the Community Forum might have some ideas.
Thank you
Dan, I have auto traded on TOS. In my IRA.
I have been with OptionsXpress since 2003 and for the most part I have been very happy…they have lots of educational tools and have done a great job of making options order entry very easy. Commission on options trades are a little more than some but I have never had a bad fill and in some cases I have had my limit orders filled better than the limit. They offer no fee IRA’s as well and you can trade spreads in the IRA accounts. I have looked at other platforms and until I am ready to do this full time with a direct access broker…I just have not found an alternative worth leaving for.
With this trade you will not have to buy the stock to fulfill the put you sold. The put you bought will cover that. You will have to have the cash difference available or margin available to cover 170-165=5-1.30=3.70*100=$370/contract this is the maximum extent of your potential loss. The maximum potential gain is 1.30*100=130 per contract. Since you are risking 370 for potential gain of 130 or essentially a 130/370=circa 35% return. Make sure to trade Feb19 calls and not the Feb 4 calls.
Dan: You are the most talented teacher with the absolute best approach to risk management out there. Thank you for this wonderful opportunity. I would not be learning about options if not for OMM. They just seemed to scary … until now. BRAVO!
Dan: You are the most talented teacher with the absolute best approach to risk management out there. Thank you for this wonderful opportunity. I would not be learning about options if not for OMM. They just seemed too scary … until now. BRAVO!
Thank you, Pard! I do appreciate that. Teaching others to trade successfully is a higher calling than trading successfully myself. The latter is a prerequisite for the former…so I’m lucky enough to be able to do what I love for a living. :o)
Keep up the great work!
Dan
kenneth Sorry to say still fog bound. What is the result if the Market price at expiration has collapsed to $ 150.00 ??
@ Kenenth- if the market price is above 170, you keep your $1.30 premium. Life is good.
If the market price is below 170 but above your break even of 168.70 (assuming you got a 1.30 credit) then you get assigned on the 170s, sell the stock in the market and make some money; Life is less good.
If the market price is below 168.70 but above 165 you get assigned on the 170s, sell the stock into the market and lose a bit of money. That’s unfortunate.
If the market price is below 165 you get assigned on (and buy at) the 170s, exercise (and sell at) the 165s and you lose the $5 difference between the strike prices, less the premium you brought in, so you lose $5-$1.30, or $3.70. Good thing we capped the downside rather than just selling the 170 put.
Dunsek – Just so I understand, will I have to execute a “sell to close” the $165 put if the stock price is below $170 at expiration or does the broker close this out for me?
Paul,
The only time you will “Sell To Close” the $165 PUT is if you want to get out of the trade before expiration.
You would want to do it as a single trade (“Buy to Close” the $170 PUT AND “Sell to Close” the $165 PUT at the same time).
Otherwise, if you just “Sell To Close” the $165 PUT you will end up with a NAKED SHORT Position on the $170 PUT, which is very risky because you have to buy the stock at $170.00 if the market price is below $170.00 on expiration (even if it goes $0.00 ie: bankrupt company). That is technically up to $17,000 of risk for each $170 PUT you are short.
If you don’t exit the trade before expiration then 1 of the following 3 scenarios will play out:
1. If the $165 PUT is In The Money (ITM) (meaning the stock price is $164.99 or lower) come expiration date Feb 19th, your broker should automatically exercise it. (Be sure to verify with this with your broker, since it’s possible your firm has different rules). You will also be assigned on the $170 PUT in this instance, but this should all be pretty transparent to you. If you sold a 1 of the above Bull PUT Spreads, You will see in your account log after Feb, 19th where you bought 100 shares of AMZN @ $170 (you were assigned on the $170 PUT), then sold 100 shares of AMZN @ $165 (your broker exercised your $165 PUT). So you would have a loss of $500 from the stock, but you took in a credit of $130 when you sold the PUT spread so the Net Loss is $370.
2. If the $165 PUT is out of the money (OTM) (meaning the stock price is $165.00 or higher) come expiration date Feb 19th, your $165 PUT option will simply expire worthless and disappear from your account. If the stock is above $165.00 but lower than $170.00 then you will be assigned on the $170 PUT and when you log into your account after Feb, 19th you will find you now own 100 shares of AMZN for each $170 PUT you sold in the above spread. Your account will show that you bought the 100 shares @ $170.00 even if the market price is less than that. You can then sell the 100 shares of AMZN at a loss, or hold it if you are bullish. NOTE: Your broker may issue a margin call or simply sell the AMZN stock position for you with a market order if owning these 100 shares causes you to exceed your margin limits.
3. If both the $165 and $170 PUT are out of the money (OTM) (Meaning the stock price is $170 or higher) come expiration date Feb 19th, both the $165 and $170 PUT’s will expire. There is no action needed on your part they will just be gone from your account and you are left with the $130 credit you received when you sold the spread. You have a Net Profit of $130
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Paul, does that clear up your question or did I confuse you further?
Shawn – Excellent explanation, much clearer and very much appreciated. Thank you.
I understand the theory behind all that Dan is doing. I have experience with call/put writing. However, the bull put spread is something new and a strategy that I frankly was missing until now. it is the actual mechanics of the trade at expiration if AMZN was below $170 but above $165 that had me confused. Your explanation has cleared that up. Again, thanks.
dunsek many thanks for clearing some of the fog . Does the 1.30 credit arise from the different price of the respective put options.-if so I believe i see the outline of the road ahead – aka hedging or insurance against a possible fall in market price
Thanks Dan and everyone on the forum. With what Dan shared and then mixed with the comments from the experienced investors I am learning, on paper trading 🙂 I would not be dong options, if it was not on a forum that I trusted and felt safe on. Thanks Dan and the OMM team and all you guys how post.
Charles — you are a prudent man! Congratulations, my friend. You are respecting your money…an essential characteristic of successful traders, and a missing characteristic of every single failed trader I have ever met.
Keep it up — you’ll get there! :o)
Dan
Do I place order using Feb 11th for both strike prices. One choice it gives me is Feb11th for 170 and Feb 4th for 165 part. My instincts tell me to put Feb 11th for both. Veronica.
Niether. The Monthlies for Feb (which is what you want) are Feb 19th.
Dan,
I know from listening to your great videos on SMM that you are a great teacher. But I am totally new to options (as I wrote to you earlier, I would not even have thought of options if it were not your guidance). I have to say that your explanations are pure Chinese to me. This is no doubt my ignorance. But I would appreciate if you could please advise me how to get started understanding the trades.
Thanks in advance for your advice
Stephane
Stephane…If you have not watched the videos in the education section then you need to do that first….and then you need to watch the again…and again…until the light goes on…if the video’s don’t get you then go buy a book on the basic of options and do some self study…There are a ton of books on Amazon…I would be willing to be that a couple trips through the education video and reading one book on basics of options your understanding of Chineese will improve dramatically.
Just wanted to let everyone know that I was able to get a fill today on AMZN bull put spread for net credit of 1.30! With only a couple of weeks left before options expiration I think we all have a great chance of staying OTM on the short put. Can anybody who understands the Greeks well explain to all of us how theta and delta affect the value of a bull put spread and what is profitable and not. For instance today on AMZN Delta is 15.07 and Theta is +11.36 using TOS. I know different brokerages use different value representations but I believe this indicates dollar values in TOS. Not sure how to interpret it though. Since AMZN is trading at $118.32 today does that mean that the option spread as a unit lost $11.36 today in value? Since the primary options instrument is the short which we want to stay out of the money and decrease in value to nothing, does this mean a positive value in Theta on a daily basis is good or what? Can some of you long time options pros help us beginners out here?
correction on that price for AMZN it closed at $173.71, OTM on our short put.
Dan, could you please specify the type of order clearly like Buy To Open or Sell to Close instead of just saying Buy or Sell? I really appreciate it. Thanks
@Bhaskar- have you watched the Open and Close tutorial in the Education->Option Video Tutorials section?
Buying to open is just buying something new. Buying to close is buying back something you already sold short
Selling to open is the same as short selling, and Selling to close is just selling something you own.
Watch that video. Dan’s explanation using ‘the door to the risk room’ is really clear.
Dan This viedo was done so well I had an epiphany and now understand the relationship of strike prices to time decay. Thank you. Options are so hard but when yoou get it you want to smack yourself on the head because it was so obvious.