Search for Verticals with Spread Hacker | John McNichol | 12-4-19 | Trading Vertical Spreads

good afternoon everyone john McNichol
here and welcome to trading vertical spreads today we’re gonna take a look at
the scan tab on the thinkorswim platform and use that to see if we can search for
kyv session do appreciate you being here once again you can see my twitter handle
on the screen J McNichol underscore hey learn more about the markets some for
financial education here at TD Ameritrade and also learn a little more
about myself and some of our fellow instructors there let’s take care of her
disclosures and we’ll get right into it options are not suitable for all
investors as these special risks inherent to options trade and may expose
investors and potentially rapid and substantial losses carefully read the
provide a copy of characteristics and risks of standardized options also
spreads straddles and other multi leg option strategies can entail substantial
transaction costs include multiple Commission’s which may impact any
potential return also advanced option strategies often involve greater and
more complex risk than single leg option trades and investors may also wish to
contact a tax advisor regarding the tax treatment applicable to spreads and
other multi leg action transactions now while this webcast may discuss technical
analysis other approaches include fundamental analysis may serve very
different views and in order demonstrate the functionality of the platform we
will be used in actual symbols keeping in mind TD Ameritrade does not make
recommendations or determine suitability of any security or strategy for
individual traders any investment decision you make and your self-directed
account is solely your responsibility past performance of any security or
strategy does not guarantee future results nor success and the zero
Commission’s applies to online US Exchange listed stocks ETFs and options
trades there’s a $0.65 per option contra plies to option trades now the paper
money trading that software application is for educational purposes only and
successful virtual trading during one time period does not guarantee
successful investment of actual funds during later time period as those market
conditions change continuously and keep in mind back testing a
particular strat trading strategy things like probabilities key word there is
probabilities not a certainty even though it may have worked in the past no
guarantee that it will continue working in the future as all investing involves
risk including the risk of loss and a good afternoon you’d as well Alfred
Chuck Ricardo Nancy let’s go ahead and get to the platform and we’ll get right
into it so our agenda for today we’re going to review the scan tab for spreads
we’re gonna take a look at the spread hacker there’s various ways of scanning
for different option trades on to think of some platform I’m gonna just show you
another way of doing that we’ll go ahead and based off of some of the spreads we
look at we’ll take a look at the charts see if there’s any technical setups that
may support doing that practice trade and then we’ll go ahead and do a
practice trade as well we’ll start off by focusing in on short verticals and
then time permitting we may take a look at ways of looking for some long
verticals as well so as a starting point what I’m going to do is we’re going to
go to the scan tab right at the top of the screen and on selecting that scan
tab you’ll see there’s a few types of scans you know there’s a stock hacker
those of you that may attend some other webcasts and others mentioned about Mike
also in our advanced concepts workshop we’ve utilized tools such as a stock
hacker to look for stocks with you know high implied volatility we’ve done that
in the past as well one can search for different options and then there’s also
a tab here called a spread hacker now keep in mind scans are not perfect
but it could be a good teaching tool and you know if you have an idea of what you
may be looking for you may be able to find different spreads that may meet
some of your criteria and what we’re gonna do is walk through some examples
of some criteria that one may consider there so again we’re on the spread
hacker now I also need to preface this discussion that for some reason unlike
some of the other scans that are available on the platform one cannot
save this scan so when you put in the results typically they’ll stay there
unless you actually delete it but unlike the stock hacker there’s not a way of
saving a particular spread or particular criteria but let’s go ahead and walk
through this some of the considerations to is you know what are you going to
search through one can search the entire market possibly go through and look at
an individual watchlist you know we’ve utilized that penny
increment list in the past maybe go ahead and look at the S&P 500 you know
one can go ahead and search for spreads throughout any of your personal
watchlist or even on a public list as well so we’ll leave the penny increments
up here for a moment and what we’re going to do is we’re gonna go ahead and
start adding some of the criteria notice there’s a + mark to add that criteria in
the upper right hand corner here so we’ll go ahead and click on that and
we’ll start add in some of our criteria now one of the first things we can do
I’m gonna go ahead and move the screen over so we’re a little and large there now I’m gonna click on the drop down
over on the right and one of the first things we can focus on is the underlying
price think about a price range of stocks that you may want to look for
spreads now keep in mind there’s always risk of assignment as well
with a spread when that short strike goes into money so let’s say we’ll put a
range of let’s say around 30 to about $100 so we taken care of an underlying
price filter another thing we can do we’ll go ahead and click on the plus
again add another filter we have days to expiration just happen to pop up we can
go ahead and use that one as well common approach is looking at selling time a
little more closer to expiration various date ranges let’s say for our example
we’ll go ahead and look anywhere from around 20 to about 40 days out kind of
on the shorter duration there so in underlying price we have days to
expiration let’s go ahead and add another filter we’ll hit the plus sign
again and we have Delta here now keep in mind when we have discussed
Delta in the past you know on the short verticals you know we start off by
looking at more slightly out of the money options maybe around 30 to 40
deltas as a bit of a guideline now that 30 to 40 Delta represents the short
strike but when one sells an option it has a Delta and when one buys an option
it has a delta as well and when they’re combined there is a net Delta so in this
case since we’re going to be looking for a spread we’re gonna plug in a Delta
that represents the net Delta for that vertical so as we go ahead and do that
as an example I’m going to go ahead and plug in 20 for 20 deltas and we’ll go up
to 30 here now notice that’s not the 30 to 40 Delta that maybe represent on the
short strike but fairly common when one looks at the net Delta on some of these
out of the money options spreads you may see those Delta’s be it in you
20 to 30 range for an example so we’ll leave that there and let’s see so we
have underlying price with days expiration we have the Delta let’s talk
about probabilities so we’ll go ahead and we’ll hit a another ad filter and in
the drop down there is probability of profit and on some of the probabilities
we’ve been looking at more towards the higher end when one is looking at out of
the money options those probabilities are higher that they will expire out of
the money and therefore if those options expire to have the money that would be a
profit potentially a maximum gain for these trades so we’ll look at a
probability a little more on the higher end here and so let’s go ahead and we’ll
plug in let’s say probabilities between around 60% plug in 60 and we’ll go up to
around 70% kind of keep a balance one can go ahead and put in higher
probabilities but when one goes ahead and puts a higher percentage keep in
mind that the higher the probability the lower the return and we’re trying to
find a balance between probabilities being in one’s favor but also having a
reasonable return on that risk that’s being taken so we’re kind of a accounted
for a little bit of a balance there looking at that 60 to 70 percent for our
example now let’s go ahead and add another one here and that would be hit
the spread filter one more time and in the drop-down there is a PNL margin here
P&L margin so I’m going to go ahead and click on that and we’re going to go
ahead and plug in for our example somewhere into twenties kind of the high
20s for instance one can plug in 25 I’ll do
little bit higher let’s say about 28 and then on the higher end go around 40% so
basically this represents the profit versus at maximum profit versus and
maximum loss kind of a return on risk now one may see some parallels between
this as well as with the probabilities let’s see what types of results we get
here now notice up at the top where the scan it says it’s search and it’s search
in all in penny increments that all represents the type of option strategy
now I’m going to click on that all and we’re gonna go ahead and select vertical
so we’re going to go ahead and select vertical here and then let’s go ahead
and scan see what we come up with all right one can see a few stocks as we’re
going through the penny increments here and let’s see we got Nike CBS is on here
in fact we were looking at CBS yesterday on our swing trading class there and
let’s go ahead and actually look at a couple of these charts and see what some
of these look like we’ll bring up on a chart let’s look at Nike now some of the
considerations there’s not a filter on here as or maybe on the stock filter
where you can go ahead and search filter out you know upcoming earnings events
and that could be a consideration on if one does a spread or not so as we look
at Nike we’re seeing a little bit of a bounce bouncing off that 55 period
moving average trading above the high the low day some traders may be waiting
to see a breakout since we’re starting to see a little lower highs there but as
far as constructing a spread you know typically bouncing off support could be
a way of setting that up looking at earnings is
out on December 19th so that kind of falls a bit closer into the window there
some traders may speculate going into that event otherwise if not maybe moving
on to something else but will I keep that there for a moment let’s go back to
that scan tab there let’s look at the Nu e looks like that’s a new still a lot of
the material stocks have moved up so generally you can see a decent trend as
far as rise and moving averages higher highs higher lows made a new high dip on
that pullback they’re not as dramatic as the rest of the market was and we’re
seeing price training above the high/low day so we can see some support and
notice as far as earnings earnings came out in October there so probably are not
concerned about earnings over the next you know 20-some to 40 days let’s see
what that spread looks like now this one’s going out to three January so a
little further out closer that 40 days I the strike is a $5 under correction a
$55 strike being sold with a 52 being bought so that’s about a $3 wide with a
potential mark of about 69 70 cents there’s a probability of profit again
lined up with those a demony options the return as far as on the maximum game
around 30% and you know as you can see a line between P&L margins and maximum
profit so let’s go ahead and crunch the numbers on this one if we go ahead and
look at the chart that 55 strike is pretty much right just a little bit
above that support generally as far as the spreads
traders may be looking for that short strike to be at or below that support
you know the low on this day was around 54 58 so probably just about 40-some
cents above that there now if we go ahead and go to trade tab
you know you maybe construct may be a similar spread that may come up on that
go ahead on the layout will have our Greeks there and that three leave leaves
three January was about thirty days out and there are some 50-cent strikes in
here too so you know we may be able to do a comparison and look at you know
that fifty four and a half so I’m gonna go ahead and right-click on this and
let’s say we do sell vertical there’s a fifty four and a half now notice it goes
to the next strike so if we were to go ahead and click on this and let’s make
this closer to a two dollar wide fifty three and a half now notice so this
example would be a one dollar wide let’s actually make it a little more wider a
two dollar wide so there’s about twenty six cents there so there’s fifty two and
a half potentially credit of about forty six cents if we do a calculation as far
as that return on risk and go to our calculator let’s change it out will
switch to gadget now if anyone has any questions on anything feel free to let
us know I’m leaving a calculator and when I click on to confirm and send
there’s our maximum profit forty six maximum loss which is the two dollar
wide minus the credit of 154 so forty six divided by 150 for that would come
out to be about twenty nine point eight percent return on risk
so if we want to go ahead and attempt to place this we can position size this to
a maximum loss if I did ten contracts that would be about $1,500 which in the
context our net liquidating value in this account stands at third three
hundred and ninety one thousand so that’s a relatively smaller amount
that’s a well under a half a percent risk on this account so one can position
size accordingly I’m gonna go ahead and make this into ten hit confirm and send
there we can see our maximum gain maximum loss and we’ll send this through
and attempt to see if it fills at that price now there was a little bit of a
spread between the current market which is close around forty one cents we’re
trying to sell this for forty six cents did not fill right away we’ll see if
that fills if we did want to adjust that we can go to the monitor tab under work
in orders there’s our order currently working you know kind of sitting at the
mark if I’m willing to take a little bit less for that we can do a cancel and
replace and we can adjust off of that mid price let’s see if we can get it for
about forty five cents cancelled the other one that’s in play we’ll see if
that one gets a better fill if one gets closer to the natural price there’s a
greater probability that being filled let’s go and look at the chat here
let’s see Riccar says can you take the penny increment stock watch list and
create another watch list with no earnings in one month or whatever oh
yeah absolutely yeah you can go ahead and scan any
individual list that you want and so if you go ahead and you can create a list
of stocks that you know do not have earnings and then scan through that just
one of many examples let’s see what else we got here certainly we did that as an illustrative
example you know keep in mind that you know just because the stock is near the
top of the list doesn’t necessarily mean that that is the you know the number one
pick there looks like these are sorted by probability of profits or the higher
probabilities based off of those deltas or towards the top however that
probability is not a certainty and you see various stocks widely trade stocks
both in a retail steel energy there’s one I was looking at earlier I’m not
sure why didn’t pop up on the list here but there is Conoco Phillips there let’s
look at cop Co P price bouncing today notice no earnings coming out at least
right probably with next twenty or thirty days
let’s go ahead and take a look at this one this is also going out to about
three January that’s a three dollar wide if I go ahead and and with that 59 strike the short strike
the expectation is that price would stay above 59 if we go back and look at the
chart notice that 59 is kind of right at that low so it certainly makes sense why
it has a greater return because it’s closer to that underlying price a little
more premium for trying to possibly increase our probabilities we may look
at a lower strike so just because it comes up on the scan doesn’t mean that
that’s the only one that one may look at but may point you a little closer you
know if we kind of take a look you know add a 58 which is a little bit lower on
the Delta let’s say we right-click on this and let’s say we look at a $2 wide
we can do sell vertical now notice there’s a deep and wide – so if you know
how many strikes separate that you’re looking for you can come here and do
deep and wide and let’s say I do one month by two strike
vertical and then that should construct a $2 wide in this example now notice
here that’s about a 40 cent credit you know some traders may be looking for a
larger credit think about return on risk 40 / 160 I think that’s a little bit
closer to about 25 percent 40 / 160 about 25 percent now keep in mind
there’s also the transaction the 65 cent per contract that can eat into that
return so that’s why some traders may be looking for a little more a little more
of a buffer so possibly with the one we were looking at even though it may be
closer to the strike one may be looking for a greater return on that risk in
this case that’s a three are wide and if we go ahead and take
that 70 about 70 and a half / 22950 again / 22950 so there’s that 30% there
so let’s go we’ll do an example this one as well I’ll go ahead and I’ll do we did
let’s say about six contracts just a little wild wag math there that’s about
1,300 let’s say I’m looking for about 1500 to risk as a percentage of this
account so I could probably do about maybe seven to eight and we’ll roll it
back to seven there there you about 1600 now once again as we look before placing
it you know there is that natural and mid-price natural is essentially the
market price mid is in between the bid and the ask more widely traded stocks
and options should have a relatively smaller spread will attempt to go ahead
and let’s see if we can adjust this try and just it down just a little bit there
and we’ll send this through looks like we still don’t have a fill on there so
up looks like we got a fill on ConocoPhillips looks like the one on on
new core still work in there again we can always go in there and see if we can
you know continue adjust in that and just making sure it’s within a
reasonable return on what you’re willing to take there so looks like a hard time
trying to fill that one so we’ll go ahead and we’ll continue there let’s see
any other questions we have yeah Texas John says would open interest be helpful
we can do that by going up under layout and you can bring up volume and open
interest and notice that and this is when you get into some of the weeklies
there may not be as much volume and open interest also I only think about it too
if and notice no sooner we spoke we did get filled on that new core one now keep
in mind you know as you go into some of these weeklies and non-standardized you
may see relatively low volume and open interest some of the considerations
though is look at the bid and ask price look at the difference between the bid
and ask spread and we’ve been utilizing a bit of a guideline as long as that
spread is less than 10% of the ask price we can see that there is a reasonable
market there now those spreads can open and close certainly the more widely
traded the tighter the spreads are expected to be thanks for sharing that
Texas Sean all right and let’s go ahead and then we
got time to do one other scan now when I was doing this a little bit earlier I’m
not sure if it was just with the platform I didn’t bring up any results
right away so I showed you on how to bring up some examples of some short
spreads so I’ll leave this up for a few moments there if you haven’t already
made note of it so the criteria that we did for the short side is on underlying
price you know looking for a $1 range in this case we were looking somewhere
around the $3,200 range I’m not sure why that zoom in up there let’s see if I can
try something a little different we’re looking at days to expiration and days
expiration we are looking at around 20 out to 40 days we had Delta and we’re
looking at the net Delta on that spread between 20 and 30 then we had
probability of profit we’re looking at that between a range of around 60
percent to 70 percent and we’re looking at a P&L margin that return on risk
minimum of closer around 28 percent up to around 40 percent so as you can see
get some examples of various verticals over that time period there you know if
you want to change and go to a personal list as was mentioned earlier you can do
that or even go into a public list and look at individual stocks there alright
let’s go ahead and run through a one potential example for a long vertical
let’s see if this one will work for us today if you have any additional
questions feel free to let me know so I’m gonna go ahead and bring ample
penny increment list the same as wet the DEP now the inverse
of that of having low probabilities is we should also be looking for higher
reward so in that case we would go ahead and put an example of let’s say 60%
profit and let’s go up to about 120 so we got those numbers plugged in I’m
going to go ahead and scan this see if we get some results and there we go
that’s better than what hey and here we’re looking at some examples
of some calls now as far as results you can go ahead and select and bring up as
many results as you wish we still have this sorted by probability of profit so
kind of the higher ones which are kind of into 40s here let’s look at a few
examples so you know here’s 27 December for ExxonMobil now what one’s looking at
is the short strike is that should be the target for the price over the next
number of days going in expiration in this long vertical we’re looking for
prices to trade through the spread so I’m gonna go and type in exo-m so it
allows us to do that so bounce
it’d be profitable so if I go ahead and let’s look at that scan tab now this was
about a dollar wide let’s see 27 December if I right-click on that and
let’s say create a duplicate order it’s a 50 cent debit which means when you do
your confirm and send and look at your maximum gain and maximum loss this is
essentially a 1 for 1 plus your Commission’s their breakeven $69
ExxonMobil the underlying is at 68 59 so the price doesn’t have to go very
strongly to necessarily be profitable now if I wanted to look for expect a
stronger move you know one may be looking at a $2 wide maybe target in 70
so if I go ahead and modify that trade let’s say we make it 70 a little bit
higher now that debit will be more but also your game potentially is more so
look at the return here would actually be a little bit greater than 1 to 1 you
know if I want a position size this will do that I’ll just do 10 contracts will
just do a fixed lot here hit confirm and said and we’ll go ahead and we’ll send
that through all right so we went ahead and we’ve gotten three
practice trades in two examples of short verticals and one example of a long
vertical hopefully you learn something new at that again I’ll bring up the
screen once again for the long vertical and not much different as an example on the longer
on risk of somewhere being along the lines of 60 to 120 again these are
illustrative examples in the case of the deltas and again this is a little more
of a moving target but I started off on the long verticals with a net Delta of
10 to 20 and reverting back to the short verticals which are more of the higher
probability as far as tweaking it again all we did we did Delta’s between 20 and
30 for the short verticals we’re looking at higher probability so we did between
around 60 to 70 and as far as the PL since these are higher probabilities
looking at a lower PL and we did kind of the high 20s up to around 40% when you
those you’ll get those separate results there and we was consistent you know we
did have similar underlying price ranges and the days of expiration on the
verticals looking at that twenty to forty so hopefully you learn something
new today as was mentioned Vincent I mentioned earlier so for some reason
don’t know why as far as with the scans for the spread hacker there’s not a save
function on there however if you do go ahead and put these changes in there
when you exit the thinkorswim platform it should save whatever the last
instance was and you should be able to bring that back up and then go ahead and
make some of those tweaks unlike the stock hacker which we’ve demonstrated in
the past you can save the stock hacker but for some reason on the spread hacker
know and also keep in mind when you do set this up make sure that you select
the strategy and since this is trading verticals our focus has been on
verticals make sure you have verticals selected and an appropriate liquid list
of stocks we use penny increments for our examples as was mentioned some
suggestions you can go ahead and build up your own list of stocks that you know
may not have earnings in that next twenty to forty days and go ahead and
run through that you’re very welcome Tim thank you and since there are no
additional questions we’ll go ahead and we’ll let you go for the day so what
would encourage you to do is on the thinkorswim platform go ahead and create
a vertical spread scan we went ahead and gave you those criteria as far as price
days expiration deltas and your probabilities there and then based off
of those results go ahead and do a practice vertical whether a long or a
short vertical and manage that over the next couple of weeks
just as we do in our class we’ll go back and look at some of our previous trades
if you see our recorded sessions for instance last week we reviewed some
previous trades and we’ll continue initiating and managing these vertical
spreads each and every week so if you’re here live we’d certainly love to see you
if you can’t make it and for those you that listening to the archived sessions
appreciate your support as well and would expect you to do the same thing so
thank you Alfred Thank You Juan let’s go ahead and take
care of our disclosures as we round things out remember in order to
demonstrate the functionality of the platform we had to use actual symbols
keeping in mind TD Ameritrade does not make recommendations or determine
suitability of any security or strategy through the use of our tools any
investment decision you make in your self-directed account is solely your
responsibility so thanks so much for being with here folks
have a great week and we’ll talk to you again real soon bye now you

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