Narrator: Hey everyone. I'm Education Coach Michael Kealy, and today, I'm going to show you how to trade long calls and long put options on thinkorswim® web.
thinkorswim web is the browser-based version of thinkorswim. There's no download required; just go to trade.thinkorswim.com and log in. thinkorswim web takes essential tools from thinkorswim desktop and makes them easier to access and even easier to learn. Though the web version is a little different than using the desktop, it has a lot of the powerful options-trading functionality thinkorswim is known for.
As we go, I'm going to give you some strategy pointers on long calls and puts, but this video assumes you already know the basics. If you're new to options, I'd recommend checking out our other videos to get your bearings on options basics. Keep in mind that options trading involves unique risks and is not appropriate for everyone.
So, let's start with some background on long calls. Remember, a long call is a speculative bullish trade where you buy a call option, expecting the underlying price to go up a lot and to do it quickly. Some people try to win big by trading long calls around high-volatility events like earnings or by choosing far out-of-the-money, or short-dated, contracts with a low probability of success. I'm going to show you a potentially smarter approach meant to lessen the negative impact of time decay and potentially increase the probability of success. It boils down to choosing at-the-money options a few months from expiration on uptrending stocks that you believe are ready to pop. It's still a pretty speculative trade, but these factors are all meant to help increase the likelihood that the trade could be profitable. Let's jump in to thinkorswim web and get into it.
First up, you've got to choose an underlying. We're in our paperMoney® Positions page, but I'm going to look at dollar tree DLTR. I'll click here to close the side bar. As you can see, it's highly liquid, with the average volume at 4.7 million shares traded daily. On this six-month daily chart you can also see its 30-day moving average is already in an uptrend. Of course, there's no guarantee that upward trend is going to continue. But for a long call, we need more than just an uptrend—we need significant upward movement in a short amount of time. You can see that today it's on track to close above the high of a recent low day. This could be a signal that the stock is bouncing off support and potentially ready to make an upward move. This can serve as a potential entry signal for timing the trade.
Once you've chosen an underlying, you've got to select a contract. To do that, I'll pull up the option chain by scrolling up and clicking the arrow where it says Option Chain.
In short, we're looking for highly liquid options with plenty of time to expiration and without inflated implied volatility.
The first part of that decision is choosing your expiration. Even though you may only plan to be in the trade a few days to a few weeks, consider going much further out for your expiration–think around 50 to 100 days.
We don't plan on holding the option all the way to expiration; we're just trying to take advantage of a projected price move and get out. Choosing an expiration that's further out helps avoid the worst of time decay that really kicks in as a contract gets closer to expiration. For this example, we're going to go with this January contract, which has 46 days to expiration. This expiration is on the short end of our time frame, but liquidity is higher.
There aren't any earnings for Dollar Tree coming up in the next few weeks, which would impact implied volatility.
Next, let's take a look at the strikes, which I can see by expanding the January expiration. There are lots of ways to customize the chain—I can change the number of visible strikes or change where the chain centers. If I want to see different info like greeks, I can click the gear button to change my columns. For this example, I've got all the info I need, so I'm going to leave the defaults.
So, for my long call, I'm going to look for something at the money—we're looking to balance moderate costs with moderate probability of the option expiring in the money. For this example, with Dollar Tree, we're looking at the 140 strike and the premium is $6.95 which means that I'd pay $695 per contract, not including contract fees.
And remember, we're looking for high liquidity. You can see that the difference between my bid and ask price is no more than 10%.
So, now that we've selected a contract, we're ready to actually buy the call. To do that, I'll click the ask price, which brings up the order ticket at the bottom of the window. Let's walk through it. So, you can see it says I'm buying the January 21 140 call. By default, it's showing 10 contracts—a default you can customize up here in the Order Defaults menu. Under Options I'm going to take that down to one contract, which will go in effect for future orders.
But, for this trade, we still need to choose how many contracts to actually buy. Position sizing is one of the main ways to manage your risk, which is crucial to trading long calls. So, for simplicity, let's say I'm trading with a $100,000 portfolio, and I'm willing to risk no more than 1%. This means my portfolio risk would be $1,000 per trade.
For a long call, the trade risk, or max loss, is the premium you pay to buy the contract, plus any commissions and fees. For our example, the premium is $695. So, our portfolio risk of a $1,000 divided by the premium of $695 equals one contract. I'll update that in the order ticket. I'll keep my order type as LIMIT and the time in force as Day.
Before I place the trade, let's review the potential outcomes by looking at the risk profile, which I can see by scrolling down here. The green and red shading represent outcomes at expiration. Because this is a long call, the max gain at expiration is unlimited.
Due to the effects of time decay, if the contract was held until expiration the break-even share price would be about $147 not accounting for transaction costs.
So now, I'll click Review.
Like we said, our max loss is the full premium, which is $695, plus the options contract fee of $0.65 per contract for a total cost and max loss of $695.65. If we're okay with this, let's go ahead and hit Send.
And there we go. We've just bought a long call. Now, I'll show you how to buy a long put.
Remember, a long put is a speculative bearish trade where you buy a put option, expecting the price of the underlying to go down a lot and to do it quickly. With long puts, we're looking for an underlying that we expect to drop in price soon. And again, we're not looking to speculate on a big event like earnings. Instead, we're trying to increase our probability of success by looking for downtrending securities that we think are likely to make a big, quick drop.
Here, I've pulled up Verizon, VZ. It has an average daily volume of a little over 20 million. As you can see on this six-month daily chart, Verizon's 30-day moving average is trending down. But remember, we're looking for a major move down, so in addition to a general downtrend you can see today that Verizon's share price has bounced down off the moving average. This will serve as our entry signal.
I'm ready to choose a contract, so I'll open the Option Chain.
Like with the long call, I'm looking for plenty of time to expiration. So we'll do the January expiration here, which has 46 days remaining.
Hopefully, that will let us take advantage the projected price move and get out, while avoiding the worst of time decay.
Now, let's look at the strikes. This time, we're working on the right side of the panel. Again, we're looking for something at the money to balance costs with probability. For this example, we'll do the 50 strike.
You can see that the difference between my bid and ask price is no more than 10% of the ask price, which is a good indicator of liquidity.
We've selected a contract, and we're ready to buy the put. To do that, I'll click the ask price, which brings up the order ticket at the bottom. So, I'm buying the January 21 50-strike put. To determine how many contracts to buy, I'm going to use the same portfolio risk of $1,000 per trade.
To figure out the max loss on a single contract, I'll hit Review.
The max loss is $115.65, including fees. So, our portfolio risk of $1,000 divided by that amount equals eight contracts. I'll update that in the order ticket. I'll keep my order type as LIMIT and the time in force as Day.
So, to confirm, I'm buying eight contracts of Verizon for a total of $925.20, including fees. This looks good, so let's go ahead and hit Send.
And there we go. We've just bought a long put.
OK, so you've seen how to enter trades. Now, let me show you how to close them. For that I'll use an example trade I entered a few weeks ago. Here under Positions, you can see that I bought 10 calls on Apple, expiring in January. For this example, let's say we had a profit target of 50% on the trade. Which, you can see we've reached. So, let's exit.
To do that I'll click Close Selected.
You can see on the order ticket that we're selling our 10 contracts to close the position. I'm using a limit order and leaving the time in force as Day. I'll click Review. You can see my total proceeds are $10,243.50, which accounts for fees. Everything looks good, so we'll send the order. Remember that we used a limit order, so there's no guarantee it will fill. And if it doesn't get filled by the market close, your order will be canceled.
And that's how you trade long calls and long puts using thinkorswim web. Make sure you practice paper trading on thinkorswim web to get a feel for how these trades can move.
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