Finally! Some reprieve.
Today’s Positions
- Canopy Growth Corp. (CGC): 40 shares @ $23.38 (6.37%)
- YETI Holdings, Inc. (YETI): 10 shares @ $28.28 (5.76%)
- Tailored Brands, Inc. (TLRD): 120 shares @ $4.39 (0.00%)
Overall account is up over $71 today to finish out with a balance of $1,760.
Both Canopy and Yeti had fantastic days today. Hoping those continue to trend positive! TLRD was down for most of the day but finished up flat so I’ll take it.
OptionAlpha Paper Trades
I have just about wrapped up the Intermediate series of videos on OptionAlpha.com (which is free by the way, and I cannot recommend the quality of the content highly enough). I’ll likely take a look at the final two videos tonight.
The main thing I took away from the videos I watched last night was how to make sure you are getting the right price once you find a potential trade. The key formula to calculate your target pricing before placing a trade is to ensure that the width of the strikes, times the probability of being profitable, is equal to or less than the credit received for the trade.
Example: $5 wide strikes X 30% ITM = $1.50 is the minimum credit you should be targeting.
In an effort to continue learning the key things to consider for various types of trades, I placed two options trades last night in the paper account that filled shortly after the market opened this morning.
SELL -1 VERTICAL ADS 100 15 NOV 19 110/105 PUT @ .80 LMT
I opened a bull put spread in Alliance Data Systems Corporation, by selling a $110 put with a Nov 15th expiration, and buying a $105 put with the same expiration. I took in an $80 credit. It teetered between positive and negative P&L throughout the day today but finished the day right about even (-$0.02). In this trade I’m essentially betting the stock will stay above $110 until mid-November.
Now, as I just mentioned above, for a vertical spread with $5 wide strikes, I should multiply the $5 width by the probability of finishing in-the-money (ITM) at expiration to determine the minimum credit I should accept for the trade. On this trade, the $110 strike has a 25.83% chance of being ITM. So, $5 * .2583 = $1.29. This is not enough credit to be profitable if I placed this same trade many times. This trade is also too big of a risk for my $2,000 account ($420 max loss is 21% of my account — way beyond the 2 to 5% limit of OptionAlpha’s strategy).
But, I haven’t placed any put spreads yet and its only paper money so I figured why not go for it, learn a lesson, and then wipe it off the account.
SELL -1 VERTICAL CMG 100 15 NOV 19 900/905 CALL @ 103 LMT
The other trade I placed was a call credit spread in Chipotle. This is a bearish position in Chipotle that bets CMG’s stock price will stay below $900 until mid-November. The credit/max profit is $103 and the max risk is $397.
This trade is also two large for my account (again, $397 / $2000 = 19.85%, much more than the maximum allowed risk of 5% per trade). But, the pricing calculation was spot on: $5 wide strikes X 18.34% probability ITM = $0.917 minimum credit needed to be profitable. When you multiply that times 100 (for the number of contracts in the trade), you can see that my credit of $103 is greater than the target of $91.70, so it should be a profitable trade if I were to place the same trade over and over again.
Overall profit on the day for all positions was $7.04. But, the first two positions I opened are sitting near max profit (TLRD and ADPT), so it looks like it’s time to learn how to close those out.
FNMNY 