Options strategies can be used to protect large equity trading profits for bullish traders who are concerned about a market downturn. In this video, we give you a compelling example of how traders can use a technique originally designed to protect equity trading profits into a powerful profit center to enhance gains on long positions even as the market is plummeting.
View Video Transcriptin the middle of February just a few
months ago before this pandemic took a
wrecking ball to the 10-year his stark
bull market that just ended it’s almost
easy to forget that the market had
reached its all-time highs and along
with that came an awful lot of traders
and investors many like you and me who
were sitting on huge gains on stocks
they were long and we’re really not
interested in giving those profits back
I’m the head trader SMB capitals options
trading desk and I can tell you from
personal experience that the traders in
our firm were faced with this issue in a
serious way in this video I’m going to
run you step-by-step through a way that
options could have been used to turn an
incredible equity trade into a
spectacular options trade just by using
some very simple options trading
concepts that I think you’re going to
find pretty compelling so stick around
hi I’m Seth Freiburg and I’m the head
trader of SMB capitals options trading
desk SMB capital is a proprietary
trading firm located in midtown
Manhattan and we provide capital for
options and equity traders from all over
the world trading both remotely and in
our offices here in New York City now
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investors all over the world they’re
really very valuable as most of you know
one of those popular trading stocks over
the last six months has been Tesla in
mid-october Tesla took off to the upside
starting at 250 and nearly quadrupling
at one point up as high as 968 in early
february you’ll then see that the stock
was pummeled by fears of the Cova Denine
teen epidemic destroying the world
economy in a month later it was down to
350 only to turn around and double off
of that point by mid-april back up over
700 as the market fears began to subside
well there are traders around here who
stayed long Tesla from late last year
through mid-february who were sitting on
huge gains just as the seriousness of
this pandemic was beginning to dawn on
the financial markets ok so let’s say
that there was a trader who was sitting
on a large gain and Tesla in
mid-february with the following quandary
let’s say that trader had a large gain
in Tesla and might not want to sell his
Tesla position because he’s very high on
the stock and he thinks it’s it
ultimately has more upside if he sells
the shares now he’ll take a large
capital gain on those shares and it tax
hit from that will be substantial yet at
the same time there were a lot of
traders out there sensing the impending
storm which was emerging as a result of
the pandemic and so they were faced with
the bad choice either write out a
potentially massive sell-off in Tesla or
sell the shares and take a sizable tax
hit on the capital gain from the great
trade so let’s take a look at a really
compelling alternative that would have
been available to a trader in that
position because of the unique nature of
options and the enormous help that they
can give to equity traders in situations
like these ok so let’s go back to
January 13th and you can see on that day
that Tesla had broken above 500 for the
fur
time and so a typical swing trader could
have sensed a breakout here and so he
might have entered a long stock position
in Tesla so let’s say that a swing
trader decides that this move is the
start of something substantial and Tesla
so he goes ahead and buys 400 shares of
Tesla at 5:02 52 which is where Tesla
was trading on that day January 13th and
as we all know that would have been a
good call and by February 4th Tesla made
an explosive up side move and in less
than a month his 400 shares which
originally would have cost around 200
1000 are now worth upwards of 300
$64,000 for a gain of over 160 3,000 at
the same time this is a trader that
would have begun to you know hear
rumblings of this growing virus threat
in China and so he could have easily
looked at his substantial gain and asked
himself am i ready to close this trade
and if the answer was no because he felt
there’s more upside on his Tesla shares
but at the same time he’s troubled that
he’s sitting on a huge gain that was at
risk given the storm clouds that were
beginning to form in the market he might
ask himself
are there any option strategies that I
can employ where I can protect my
profits at a reasonable cost and the
answer fortunately is a resounding yes
there are not only techniques for
protecting your profits but they can be
structured to have no cost at all now
before we get into exactly what could
have been done with options at this
point which I think you’re gonna find
intriguing I wanted to let you know that
there really are sound viable long-term
techniques for trading options for
income and in fact we’re currently
running a to our free intensive workshop
at the moment we’re will be teaching you
three of those strategies that real
professional options traders use
including a really simple but incredibly
effective technique that some of the
greatest investors in the world like
Warren Buffett use all the time plus an
options trading strategy that has a
statistical 80 percent probability of
profit month in and month out plus an
option strategy that you can employ with
the stock that you like where you’ll
make your target profit whether the
stock goes up goes nowhere or even goes
down a small percentage
so if those strategies would be of
interest to you then you should check
out the free options class that we’re
currently running just go ahead and
click the link that should be appearing
now at the top right corner of your
screen that will open the free
registration page in a new window so
don’t worry you won’t lose this video or
you can just head on over to options
class comm to register for this free
intensive workshop it’s a rare
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investors to learn directly from Wall
Street traders but that’s exactly what
you’ll be getting through this free
online workshop so click the link to
sign up now and don’t miss it so getting
back to our trade on February 4th this
long Tesla share trade is up over 160
thousand dollars and understandably
you’d be thinking about how to preserve
those profits without exiting the trade
now before we can structure a trade like
this a trader needs to ask himself two
questions the first question is if Tesla
turned around and sold off at this
juncture at what price would a trader be
happy to own 200 more shares of Tesla so
let’s suppose the trader was willing to
add 200 shares to your position if Tesla
sold off down to 650 the second question
would be at what price would a trader be
convinced that Tesla is overbought and
you’d be more than willing to close your
trade and sell your current shares all
400 of them and suppose that your answer
was if Tesla gets above 1060 you’d be
willing to look at selling and taking
your profits so once we answer those two
questions for ourselves we can put
together the hedge now before we get
into that though I wanted to make
certain that anyone watching this
understands how puts and calls work on
equities otherwise you won’t be able to
follow this example for those of you
familiar with puts and calls please bear
with us this was going to be brief then
we’ll jump back in to this remarkable
options hedge that could have been
constructed in this exact situation most
of you have probably heard of a call
which is a security that allows a trader
to buy the right to purchase 100 shares
of a stock at the strike price of that
option before that option expires so for
example the April 17th Tesla 1060 call
entitles the buyer of that call to
purchase 100 shares of Tesla
at 1060 per share any time before that
option expires on April 17th he can
exercise that now a put option on the
other hand entitles the put seller to
sell 100 shares of a stock that say he
already owns at the strike price of the
put option at any time before that put
expires people will frequently buy puts
on stocks that they own where they’d
like to lock in the lowest price that
they could sell their shares afford to
limit their losses if the stock goes
down so for example someone owned in
April 17th 820 Tesla put if Tesla really
tanked they could sell their shares for
820 no matter how low Tesla stock price
got so generally speaking a call option
on a stock goes up in value when the
stock rallies because a call options the
right to buy shares at a fixed price and
that right gets more valuable as the
stock price gets closer to the strike
price of that call similarly a put will
generally become more valuable when a
stock’s price is gone down because of
the right to sell shares at a fixed
price gets more valuable as those shares
drop okay so let’s take a look at what
we could have put together that day
let’s start at the top on the call side
of the proposed trade and you’ll see
that we sold four calls to 1060 and then
we bought four puts at 8:20 and we also
sold two puts it’s 650 now let’s really
break down what’s going on here and why
so first off on the call side we’re
selling those for 1060 calls
well if tesla closes over 1060 when the
options expire will be required to sell
those 400 shares to the call buyer for
1060 which is the exact price that he’d
hypothetically be willing to sell the
shares for anyway remember each option
represents 100 shares so four options
would remove all of the shares at what
you’ll remember was the upside target
price on the shares then we went down to
the put side and bought for 820 puts now
Tesla’s trading at 911
so those puts would have value if Tesla
dropped down below a 20 which is 91
points below the current market so
you’ll remember were up over $160,000 on
the trade so if Tesla closes below 820
on
expiration day the trader would exercise
his put and sell them for 820 which is
giving up 91 points on each of his
shares from the current level or a total
of about 36,000 dollars in profit giving
back on all the shares so obviously you
wouldn’t like that but if that did
happen you’d still have about $125,000
of profit left on the Tesla shares
remember with a hedge you’re looking to
lock in most of your profits while still
giving yourself some room to make more
if the shares continue to climb then
finally you can sell two of those 650
puts remember in this scenario you’re
willing to increase your position in
Tesla if the stock dropped to 650 now
significantly I’d like you to take a
look at this transaction from another
perspective which is that cash flow of
this transaction so first of all we sold
those for 1060 Tesla calls and those
were priced at 91 dollars and 70 cents
and remember all options represent 100
shares so you multiply that by 100 and
we sold four of those so that totals
thirty six thousand six hundred eighty
dollars of positive cash flow on the
four calls we then bought those four
eight twenty puts for 93 dollars and
thirteen cents
so those four caused the cash outflow of
37 752 finally we sold those two 650
puts for a total cash inflow of 69 84
and so if you add it all up we have more
than six thousand dollars of cash inflow
from this hedge so to summarize we just
got paid six thousand four hundred
twelve dollars yet we simultaneously
protected more than 75% of our profits
profits on the Tesla shares with the
only proviso being that if we hit our
target profit on the trip on the trade
we’ll sell our shares at our target
which we would have done anyway and
we’ll buy two hundred more shares at a
price we love if it drops below the
current level so even if all the options
expire worthless we just got paid over
six thousand dollars for this hedge
remember you usually pay for hedges this
is the reverse this is getting paid to
hedge it’s amazing if you think about it
but there’s more to this story let’s
move forward now to March
so on this day the market was getting
pounded as it had been for the previous
month since the middle of February and
Tesla had dropped to about 400 more than
500 points from where we had added this
hedge so let’s take a look at what
happened to our options pricing on that
day so first of all with Tesla now bound
403 understandably the right to buy them
at 1060 those 1060 goals they have
almost no value remember we got paid
over $90 for those calls and now they’re
worse worth less than two bucks and the
820 puts that you bought for a little
over $90 well thou sir those are now up
over 400 more than quadrupling in value
so you’ll also notice that the 650 puts
have gone up a lot but as we will be
taking no action on those at this time
because our plan is to buy 200 shares
more of Tesla if Tesla closes below 650
anyway there’s no action to be taken at
this point so what we can do right now
is to close those four calls buying them
back for almost nothing and closing
those long puts at 8:24 a tremendous
profit so let’s take a look at those two
trades in isolation so as you can see as
we mentioned before the original trade
netted us positive cash flow of six
thousand four hundred twelve dollars
there was a small cost to closing those
four calls because they shrunk so much
so they did cost us a total of five
hundred seventy two dollars to close but
obviously that’s a small amount but take
a look at the cash flow from selling
those 820 puts we brought in over a
hundred sixty seven dollars in cash from
those four puts because the price of
them had bloomed to four hundred
nineteen dollars after all Tesla was
trading at just over 400 so the right to
sell them for 820 is obviously extremely
valuable and the selling those puts at
this stage locks in that huge increase
in value on those puts so now the cash
flow from just the options portion of
the trade is up over a hundred seventy
three thousand dollars and while they’ve
lost value we still own those original
400 shares of Tesla now let’s move
forward to April 17th and you’ll see
that tests are closed at 7:54 on the top
options expiration day so remember in
this case we’re still holding those 650
puts but with Tesla closing at 754 they
expire worthless why because what’s the
value of the right to sell your shares
at 6:50 the stock is trading more than
100 points above that no one is gonna
sell them 400 points below the market so
those puts expire worthless so let’s
examine what has happened here by
pulling this all together so you’ll
remember that when we wanted to put this
hedge on Tesla was trading over 900 and
so the total value of these shares was
over three hundred sixty-four thousand
dollars but by April 17th those shares
had dropped in value as you can see by
over sixty two thousand dollars but
remember you would have made a huge
profit by selling those 820 puts that
you were long as the key part of this
hedge and you were also able to close
the short calls for almost nothing so
there was a tremendous cash flow gained
from the hedge of over one hundred
seventy three thousand dollars so if you
add it all up with the cash you would
have made on the hedge and the drop in
the value of you of your Tesla shares
you would have come out way ahead
so now after dropping Tesla your total
trade is way up to a value of over four
hundred seventy five thousand dollars
putting it another way had you not
bothered to put the hedge on at all your
shares would have dropped from over
three hundred sixty four thousand
dollars to three hundred one thousand
dollars but by utilizing the power of
this hedge you not only were able to
protect your position from at worst a
25% loss in profits you would have been
able to make a tremendous profit on the
hedge itself so the overall gain on the
trade exceeds the value it had before
the hedge was put on in the first place
prior to the drop and subsequent rebound
of the Tesla
shares so what is the huge lesson from
this video well most traders think of
hedges as a necessary evil a cost that
if nothing bad happens you lose and if
something bad does happen you still lose
but not as much as you had had you not
put the hedge on well with options that
paradigm completely shifts as you can
see from this example
you not only can bring in cash flow
initially with a properly structured
hedge but you can end up cashing it in
in a big way if you understand the
nature of options trading now just to
remind you as I said earlier if you
enjoyed this video and learned something
valuable from it would like to learn the
details of three real-world option
strategies that professional options
traders use all the time then you should
check out the free options class that
we’re currently running just go ahead
and click the link that should be
appearing now at the top right corner of
your screen that will open the free
registration page in a new window so you
won’t lose this video don’t worry or you
can just head on over to options class
comm to register for this free intensive
workshop it really is a rare opportunity
for retail traders and investors to
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but that’s exactly what you’ll be
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