Obviously a newbe re options: How do you create the stop? (stop loss). I haven’t been able to find such a provision at TradeMonster’s paper trade section. Thanks for any help.
It is your choice – you can open one or the other of the trades, or both. Both of these are bullish in thesis, so both expect the stock price to go higher. They are just structured with the different directional options.
Oct 240/250 bull put spread – you sell the 250 put, buy the 240 put, for a net credit (payment to you) of $2.40 or better. If the stock stays above the higher strike price through the expiration of the options, then you keep the full credit you received for placing the trade.
Oct 240/250 bull call spread – you buy the 240 call, and sell the 250 call at the higher strike for a net debit (cost) of $7.70. If AMZN continues higher, both calls are going to appreciate – but the one you bought will appreciate at better rate than the one you sold. You would also have the opportunity, if AMZN does move higher, to buy back the one you sold, and hold the one you bought – which will make you more money faster. The upside of a purchased call is unlimited … but the downside is that when the stock price moves against you, it does so with venom. That’s why naked calls are so dangerous to trade (as I have learned over, and over, and over again).
Dan could invariably explain this much better than I … and if you look in the education section there will be a video tutorial on both call spreads and put spreads (and both bullish/bearish versions of each).
Great explanation Tim ….Thanks….a lot of forum folks seem to like the Bull put spread…. what if the stock goes below the higher strike price..in this case 250..is it get out asap as loss can be huge?
Well … it’s a judgment call. If you do not mind being assigned the stock, then keep in mind that your actual cost basis for the stock would be $250 minus the amount you got paid for putting on the bull put spread – so if you got a $2.40 credit, then your cost basis would be $247.60. But then again – who wants to be assigned 100 shares of a stock at $247.60 per share? I don’t have $24,760 of cash in my account just sitting around to be used like that.
So that’s why Dan always has a stop loss exit as part of his strategy. If the trade starts to turn too violently against you, then you get stopped out. Yes, you likely take a loss – but it’s better than taking a BIG loss, right?
Another thing you can do, if a stock is swinging that hard in the other direction, is just close one portion of the trade. Buy back the 250 put. Then as the stock continues lower, your 240 put that you bought continues to appreciate, and you recover some (if not all) of the loss.
I’ve learned that there are a zillion ways to trade options – spreads, calendar spreads, iron condors, yada yada. I’ve yet to find the “Flying Wombat” strategy I have heard Dan mention once in a while (he’s always joking with that).
Obviously a newbe re options: How do you create the stop? (stop loss). I haven’t been able to find such a provision at TradeMonster’s paper trade section. Thanks for any help.
amzn bull put spread & bull call spread only pick 1 to buy ? or buy 2 ? same ?
It is your choice – you can open one or the other of the trades, or both. Both of these are bullish in thesis, so both expect the stock price to go higher. They are just structured with the different directional options.
Oct 240/250 bull put spread – you sell the 250 put, buy the 240 put, for a net credit (payment to you) of $2.40 or better. If the stock stays above the higher strike price through the expiration of the options, then you keep the full credit you received for placing the trade.
Oct 240/250 bull call spread – you buy the 240 call, and sell the 250 call at the higher strike for a net debit (cost) of $7.70. If AMZN continues higher, both calls are going to appreciate – but the one you bought will appreciate at better rate than the one you sold. You would also have the opportunity, if AMZN does move higher, to buy back the one you sold, and hold the one you bought – which will make you more money faster. The upside of a purchased call is unlimited … but the downside is that when the stock price moves against you, it does so with venom. That’s why naked calls are so dangerous to trade (as I have learned over, and over, and over again).
Dan could invariably explain this much better than I … and if you look in the education section there will be a video tutorial on both call spreads and put spreads (and both bullish/bearish versions of each).
I hope this has helped answer your question some.
– Tim
Great explanation Tim ….Thanks….a lot of forum folks seem to like the Bull put spread…. what if the stock goes below the higher strike price..in this case 250..is it get out asap as loss can be huge?
Well … it’s a judgment call. If you do not mind being assigned the stock, then keep in mind that your actual cost basis for the stock would be $250 minus the amount you got paid for putting on the bull put spread – so if you got a $2.40 credit, then your cost basis would be $247.60. But then again – who wants to be assigned 100 shares of a stock at $247.60 per share? I don’t have $24,760 of cash in my account just sitting around to be used like that.
So that’s why Dan always has a stop loss exit as part of his strategy. If the trade starts to turn too violently against you, then you get stopped out. Yes, you likely take a loss – but it’s better than taking a BIG loss, right?
Another thing you can do, if a stock is swinging that hard in the other direction, is just close one portion of the trade. Buy back the 250 put. Then as the stock continues lower, your 240 put that you bought continues to appreciate, and you recover some (if not all) of the loss.
I’ve learned that there are a zillion ways to trade options – spreads, calendar spreads, iron condors, yada yada. I’ve yet to find the “Flying Wombat” strategy I have heard Dan mention once in a while (he’s always joking with that).
I hope this helps!
Tim: Great explanation…. in lay person terms