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“This is asha welcome to another episode on let s talk stocks today. We re re going to take a look at setting up an option calendar on amazon. I gonna cover five main things when to put on a calendar. How to set up a calendar.
How a calendar makes you money why the big stocks and the profit potential on the amazon calendar trade that i put on a few days ago. So let s get started on this trade. I just want to show you hey here s a sample trade. I put on just a few days ago for this lesson.
I put it on right before the market dropped a little bit i put on a calendar. I ll let you know why here in a little bit. But ultimately this trade right now is up profitably about two hundred and seventy dollars on a risk capital of five thousand and ten dollars. So you could do the math right there.
But i ll give it to you here and a little bit of breakdown. Once we get into calculating some of these things so let s take a look at when to put on a calendar. Trade. So part one i ll let you know why i did this so i was looking at the vix.
Okay looking at the vix right here. Vix was started to spike. Which means fear was going up which means volatility was going up. Which also means you know you want to be positive volatility.
So here. It was starting to spike. And then i saw it drop back down. So that to me overall this signal of the vix starting to climb higher told me that right around this day.
So this was just a few days ago. Basically friday to put on a kind of a calendar spread because things were going higher. And it was starting to break some resistance levels. So i said hey this might be a good calendar spread if we have a major spike in the vix.
Why did i think we would have a major spike well because i saw this right here. And i thought it would at least just get to here. I didn t know or think it would get into the 20s. But that s ultimately what happened.
And it actually worked out even better so that s the the when to do it you put it on when you think mullet ility is going to go up really a calendar. Really a diagonal could be an identical thing as an iron condor. It s just you re spreading the things out the the contracts with a little bit more timeframe..
How does it work so how do you set one up so. If you look at a normal trail s. Just use tesla as an example here. If we look kind of at an iron condor or a vertical.
Okay you would normally do it in the same month. Right you would sell one here by one maybe here now with the calendar. We do the exact same thing except we do the protection further out in the next month. So that s what we basically do so we go ahead and we ll sell one at let s say let s go ahead.
And do one at 190. Okay. So we sell one a single this is gonna be a diagonal example real quick. But you ll get the idea cuz.
I m gonna move it into a calendar in a way so here s my tesla. I sold one now normally you get the protection a little bit further out. I m doing this with a vertical just so the newbies people just starting out. I m buying one newbies can understand and now there s your vertical.
Now how do you turn it into a calendar. Well what happens is is on the calendar. You go a further month out you buy your protection later and now you got yourself a diagonal now diagonal is similar to a calendar. Except it s at the same strike.
So now we take the 170 and we move that to the 190 and now you got a calendar. Now the problem is is now the price has to go down because i went out of the money so how do you get it in the money. While you do it at the same strike price so here it would be kind of 250 okay cuz tesla is around 250 so i would go 250 here i go 250 boom. We re at the same right.
There now if i want to just put it in as one trade. I could have really just done this and just gone to about a 250 calls or puts doesn t really matter and just depends. Which ones are in the money out of the money so you get the same thing here. Except.
I just have to switch the one that i m buying to august. So there we go i got it right there. And i did calls on this time because i m out of the money. It s a little bit there if i was to go maybe.
Let s say i wanted this a little bit lower. Because i expected a pullback that s kind of what i did on my amazon trade then i d probably go with the puts. Because now..
I m out of the money in the puts. So here s kind of your trade setup right there. So how much do you make or what s the next step basically that s how you set it up so how does it make money well. When you look at these contracts you re selling one and you re buying one let s reduce this to five contracts here.
So what s happening here well. I could do july could do august. So here i went june and august. I could do july.
What s happening here is that the calendar trade is expiring all these contracts they expire right. But the one that expires. The fastest is closer to expiration so here s our calls here s our puts we re focused on the calls or the puts doesn t matter. But the ones that are in the near month right so you can see right here this is the days till.
Expiration the ones that are closest to expire faster. So let s say they all have a certain decay. The ones two days left or remaining till expiration have the fastest decay. The nine days is very very fast.
But it s not as fast as the two day 16 days still decaying super quick. So basically this decay curve looks something like this where this up here could be more you know the 60 day mark. So you can see the closer you get the faster that ramps down so the 44 days decay quicker than the 72 days or than the hundred days so we sell the one at 44 days so it expires. Faster we buy one at 72 days for protection.
It decays kind of slower so this one because really quick and we profit on the difference. The difference on the speed of that decay. So that s why when we look at this contract. We get three dollars and 51 cents of decay every single day.
If the stock does not move and volatility stays equal. So basically if i move the time forward you can see every day. It kind of goes up for now. It s four dollars and 31 cents.
Then it ll go to 471 five dollars six dollars a day you make eight dollars a day 10 today and you can see the white line. Which is today it gets closer to the green line. Which is at expiration of my my short term options. There then all of a sudden is it gets closer you re making more and more money now eventually that turns into its own spread because when one expires.
You ve made the most money so you have to close this trade out otherwise now you start losing money right. So. What s the most that you can kind of make well the most that you can kind of make is at this peak usually we never get there..
But let s say you make about eight hundred dollars on four hundred eighty seven dollars worth of risk that s quite a lot typically it s not gonna happen you might hold this for let s say i don t know a couple of days couple of weeks. So if if you re doing it 44 days out you might hold it for twenty days. If you re doing it ten days out you might hold it for four days or five days. So here if you hold it for about here s a handful of days.
So we re now on the 9th or so so about a month. If you hold it for about a month. You get about 130 days on 487 dollars of capital. So it gives you about a twenty twenty five percent rate of return.
So that s how you make money. Why the big stocks well the big stocks here have option premium right the bid and the ask here they have fourteen point seven on the juicy premium. If you look at amazon here. Look at this a sixty five dollars.
If you look at apple. Even this one has some premium six dollars. If you look at facebook has four dollars of premium. If you look at something like ge you got forty four cents.
The difference between this one and that one 44 and 56. You re gonna make 10 bucks. So it s not really that s why you re doing more than juicy or 100 plus stocks. 70 stocks also easily work out fine.
But you know the more expensive. The more popular stocks usually will be just fine. That s why you do the big stocks going into point number five profit potential on my amazon trade. So here s what s happening and give you an idea and this is just a few days into it and you know when i put that on so.
Here actually. It s biking up a little bit so we got about three hundred and twenty dollars of profit. Remember this one s decaying about thirty dollars a day so since i was talking we went up about 20 20 30 bucks. This is also in part of the vega because i m positive vega.
Which means when the market sells off i profit even more that s why i did calendar trade so to give you an example here at 3 00 call it 3. 3. 20 is what i m making. 320 divided by 5000.
And 10. We get about 6 return on investment. So that s kind of what you re looking to make if i can hold it a little bit longer let s say you make about five hundred and fifty dollars..
But that means you re holding it for a couple weeks. A little bit longer you know and of course you re still using the same amount of capital. There right now. It s working out well simply because if you look at the espy.
You know we re selling off a little bit the last few days. So volatility has been spiking as you saw here on the vix. We had this increase right now. It s pulling back a little bit.
It s a little bit in the 20s so a little bit high. So it s to be expected. But even then the sp is only up five points. Which is not that amazing so if you look at the sp.
You know we re kind of rolling over so it s to be expected to have a little bounce. And maybe even a pullback now position wise. I would say i m still fairly healthy in this because i got room for this to go down even till about about 1875 and that profit picture will still look good so. Even if we pull back a little bit further.
Hey. I m good if we stay here and hang out. I m good so i can just milk it until you know until it starts looking weak or moving against me. And then i could get out of the position.
So that s how you deal with a calendar trade that s how you make it work. And that s how you stay profitable. Basically you set it up when you expect volatility to go up and that s usually when you when your vix is kind of low so when you have the vix and it s at a lower point and lower level. You expect it to go up.
That s a good time to set up calendar spreads you do it and you make money because your short term options expire faster than your long term options you want to trade the bigger stocks because bigger stocks have juicier premium and your profit potential and a handful of days could be not saying. It always will be could be about three to five to seven percent depending on how things work in your favor. Now if they don t work in your favour of course. If this was moving you know far to the upside.
I could be down two hundred and fifty dollars if it was moving further down. I could it could help me with the volatility. But again could be down to three hundred dollars as well on here so things could look completely different. But anyways that s how you set up the trade that s how you make it work and that s how you do 5 on an amazon position all right so thank you so much for joining me in this episode.
And if you have specific questions feel free to reach out at traitors fly calm or check out some of the memberships that we have regarding option trading that ll be coming out soon all right thanks again and i ll see ” ..
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