Liz: Hi everybody welcome back to the Liz and Jenny show. I'm Liz this is Jenny and this is "Know Your Options".
Jenny: I was just asking Liz, how did they find her grandma to be in the senior Olympics? I asked if it was through the retirement center.
Liz: No I think she was recruited. I mean she used to, so she used to play in the war. Like she used to play ping pong against everyone, that was her job. She would play ping pong against the soldiers as they came home.
Jenny: Really?
Liz: Yeah. She is phenomenal. As my dad and my uncle were growing up, my uncle used to challenge everybody under the sun to-
Jenny: To play your grandma?
Liz: To play my grandma. He would just come home, and there would be a knock on the door, and he'd like drag people down. My grandma would have to beat them in ping pong, so she's a phenomenal ping pong player.
Jenny: That's awesome. I hope I'm like your grandma when I'm ninety-two.
Liz: I know, she's an amazing woman. So it's kind of fun. I think she was recruited, I don't know, and she said she … Well we'll talk about the one who beat her later, because she's kind of sorry about that.
Jenny: Oh, about the one who beat her.
Liz: The one who's got the gold medal it's a contiguous point.
Jenny: So cute.
Liz: Yeah it's a lot of fun.
Jenny: Okay so today, Know Your Options, We're going to do a butterfly and not, this isn't the type of, there are a couple different type of butterflies or a couple different reasons for doing a butterfly. One is to pinpoint a strike and think, oh this is, you know, I'm going to take a shot, here's a cheap butterfly. This is where I think this product is going to end up and that's one reason for doing a butterfly.
Liz: That is, that is, and the sweet spot is, where your short strikes are, that is the pinpointing of it.
Jenny: Like Oh, I think this stock is going to pin a hundred and I'm going to do the hundred butterfly. Sometimes people will do it for that type of reason.
Liz: You can take it, remember everything is a building block. That's just what, we're going to take kind of a different angle with this one. We're calling it a big wide butterfly, or as they call it a big dog butterfly. We're using a product that isn't as expensive and just kind of showing how it's replicating a strangle.
Jenny: A straddle.
Liz: A straddle, thank you.
Jenny: Yeah, so just like selling a straddle and then we're buying the wings, and normally this would be a big dog butterfly, but this is a low priced product so, even though the wings we're buying, we're buying as far out wings as we can. The wings are less than 10 cents about, but it's really, it's not that wide of a butterfly so the risk is pretty low. This is a trade that really any size account can do, Tasty Bites account, any sized account can do this trade.
Liz: The reason is buying those wings and sometimes what, so selling, when you sell a straddle, you have to capital, a lot of times the capital required. Even in the product we're looking at right now, it's a lower priced product, so the straddle wouldn't be that expensive. When you are, we were very careful to buy the wings to not add capital. That's what I want to be, that's what I want to make people realize, is that depending on how far out you get your rings, if you're trading on a margin account, you can actually add capital to it.
Jenny: Let's go to the TOS platform. We're looking at EEM, because it's come down quite a bit. Here it is, do we have an assumption on direction? Not really, but what we do see is that the volatility is pretty high. It's at forty-nine rank and when we look at it, okay, we can sell a strangle or we could sell an [iron condor 00:03:22], but we went with the big white butterfly. It's more like just selling a straddle and if you can collect enough you'll be surprised when you look at the break evens on it.
Liz: Right, exactly. Like I said, all these trades kind of equal up to the same thing. There's no right or wrong answer here, when the volatility is higher, so we know it's okay to sell premium, and that's the bases of this. So-
Jenny: Are we trying to, you'll see when we put it into, we're going to put it in the [GTC 00:03:48] in order to close this trade and we're not trying to make a fortune off of this trade. I don't even think we're going to try to make fifty percent of this amount off this trade. We're going to be looking, I think doing this big white butterfly, it'll be similar to a [calendar 00:04:00]. We're only looking to make, maybe, thirty percent.
Liz: I think we should take it off quicker, because buying the wings does reduce your profit potential and it also reduces your profitability, because it's detracting from what you purchased, what your total collection is. So just realize that but it's very minimal when you look at these. It's minimal when you look at this.
Jenny: So if this were, so EEM is trading forty-one, fifty; and there aren't half strikes, we have to choose the forty-one or the forty-two strike as our center strike for the butterfly.
Liz: [inaudible 00:00:00] it doesn't matter.
Jenny: It doesn't, so, and we'll go to right here in November.
Liz: First can we look at the, well we'll do that afterwards.
Jenny: The rank?
Liz: Yeah I was going to say the rank. I know it's high.
Jenny: Yeah, November is twenty-two, and the rank is based off twenty-two, forty-nine based off of twenty-two.
Liz: Perfect, just about fifty.
Jenny: It's fifty. Yeah right around fifty, and so let's say we do go with the forty-one, and you sell the forty. Butterfly, or this is actually an iron butterfly, whether we do a butterfly or an iron butterfly doesn't really matter.
Liz: That's a great point, it doesn't matter so let's talk about the difference between the two. We see iron butterfly, iron just means you're crossing the fence, you got the call spread and the put spread.
Jenny: With an iron butter here we'd be selling the forty-one call and selling the forty-one put, and then buying the wings, buying a cheap put and buying a cheap call, to define our risk.
Liz: Right that is essentially it. Then with a typical butterfly, with a traditional butterfly, even if it is wide; you are going to be using all calls or all puts. So you'd be buying one, selling two, buying one. Now I want people to realize those are the same trade.
Jenny: The price, you should see [your PNL 00:05:37], as far as your maximum profit and maximum loss should be the same, and we could walk through that and take a look at it because it should add up to be the same.
Liz: Right those are exactly the same trade.
Jenny: If we sell the forty-one call and sell the forty-one put, essentially it's selling the forty-one straddle and you can see we're clutching about two-fifty. So if you look at your break-evens, thirty-eight fifty and forty-three fifty, we're not going to leave this till expiration, we would hopefully close this soon for a small profit.
Liz: I'm going to double check something while you're doing that, because something looks off to me.
Jenny: Does it?
Liz: Well I thought it was more capital this morning. For this EEM.
Jenny: Yeah there wasn't?
Liz: No, no you're thinking of the other one the [jade lizard 00:06:17]
Jenny: Oh yeah, yeah, yeah. Yeah. Okay, thank you.
Liz: EEM is only a forty-one dollar product.
Jenny: Okay you're right. You can see. So if that tied up around eight or nine hundred dollars this straddle and then you have unlimited upside and downside risk, we're going to buy some wings here. The wings because, in EEM the wings are cheap, so if you-
Liz: Well typically these bigger wider ones, typically these big dog butterflies are done in higher priced products to conserve capital. That's one of the main reasons you would take them on.
Jenny: Yeah.
Liz: I think that's why I was surprised by how low the capital was but I am mixing up the jade lizard. So sometimes you got to make sure that you're not increasing the capital required to buy the wings, cause you can.
Jenny: Yeah, but here these wings are pretty cheap. If you look at the calls and so I look over right to this forty-six call and it's only, it's going to be five cents, so will you give up five cents by buying that forty-six call.
Liz: When I say make sure that you're not increasing your capital, so we're looking at these calls here, you got the forty-six, forty-one, so there's a five dollar difference in there; so you know that that's going to require five hundred dollars, minus what you collected in capital.
Jenny: Yeah so that's what Liz is talking about when you say increase to capital. Increase the capital used for the trade.
Liz: Something crazy is going on.
Jenny: I don't know what's going on out there. I wish we, I don't know but there's a lot of scream, and yelling, and clapping out there. We're missing all the excitement.
Liz: We are missing all the excitement. I hope someone is still at our control desk.
Jenny: Hopefully we're still on air. It's our CFO's birthday, and I saw lots of balloons and …
Liz: It's our CFO's birthday, she must have got a standing round of ovation by a stampede of elephants because that was so loud!
Jenny: About that call, it's only five cents, now, if I look at the call spread it's the forty-one, forty-six call spread. It's a five dollar wide call spread, you might think a five dollar wide put spread, five dollars down on the puts that one's nineteen, I guess … I guess that's fine.
Liz: Well yeah butterfly is symmetrical.
Jenny: Well …
Liz: For all intents and purposes. For all learning purposes, if we're going five up, we got to go five down if this a big dog butterfly set. Know your options.
Jenny: In here you see the put skew. Here's the put skew, you go five dollars up and that call is five cents. You go five dollars down and that put is nineteen cents.
Liz: That show's there's more fear to the downside, that's what should be happening in markets all over the world.
Jenny: I guess I'll bite the bullet and pay nineteen cents. I don't like to pay nineteen cents for that, but it's
Liz: Unless you want to go up higher on the call spread, then we can do down lower on the put spread. To keep it-
Jenny: Well it doesn't have to be symmetrical.
Liz: You're right it doesn't but that's considered a broken wing butterfly and then we, we need to start over.
Jenny: Then we'd need to change the title of this segment, to the broken wing butterfly. [crosstalk 00:08:58]
Liz: If you want to get wider, pick your put and then we'll go that way, [the half 00:09:03] the call.
Jenny: Well why would we got the half the call when we could buy a call fro five cents?
Liz: Yeah you got a good point. Alright-
Jenny: Never mind this is the butterfly segment we will stick with the symmetrical five dollars up, five dollars down. Likely said if we went five dollars up and seven dollars down it would be a broken wing butterfly.
Liz: You're just adding a little more risk on, which Is fine yeah.
Jenny: Yeah, but here we'll just keep it like this. I'm already filled, I threw this one in earlier, I'm already filled.
Liz: So the funny thing about this, is that, it's technically a big dog butterfly but kind of a chicken.
Jenny: It's a big dog butterfly but it's only a five dollar wide butterfly.
Liz: No that's what I'm saying, it's kind of a chicken because it's darn near fifty percent of the width of the strikes.
Jenny: I know, so if we just sold the straddle we'd be collecting around two-fifty, by buying those wings, we're collecting, two twenty-six. We're giving up a quarter. Look at the risk-reward, our max lose vs our max profit on this.
Liz: It brought our break-evens in by 25 cents. Instead of eight hundred and thirty dollars in capital it's tying up two hundred and seventy-four dollars in capital. With a standard symmetrical butterfly. Meaning that we're not breaking a wing, the only risk you have is the inverse of what you collected, if it's the iron.
Jenny: Yeah. Right, so five dollar wide minus what we collected, minus that two twenty-six, give you your risk of two seventy-four, which is the capital required. Let's look at this, we're tying up two seventy-four, we can make two twenty-six and we've got the iron butterfly in with the call spread and put spread. If we put in all calls or all puts with the same strikes it should be the same.
Liz: It should be exactly the same. Now I don't know if people stay from segment to segment but right before this, our email segment, somebody had an iron butterfly in and they were collecting five-ten, or five dollars wide, so this is what it will typically look like. That's a very rare occurrence.
Jenny: Right your max profit and your max lose should add up, to equal the width of the butterfly and when we say the width of the butterfly, I know this is forty-one, thirty-six, forty-one, forty-six. That's ten dollars total, but it's the distance between, why are you laughing?
Liz: Nothing. Cause all I keep thinking about was saying those numbers again, and I was like, only if she's five-three, from that song.
Jenny: What is it "Baby Got Back"?
Liz: Yes, I think those are the measurements from "Baby Got Back".
Jenny: Okay, thirty-six, forty-one, forty-six. You think those are the measurements from baby got back?
Liz: I think they are.
Jenny: I don't think, I think that's big.
Liz: [inaudible 00:11:23] the "Baby Got Back". As soon as you said those numbers all I could think in my head was, only if she's five-three.
Jenny: Baby got back. Can we get some baby got back to take us out of this segment?
Liz: Sorry about that.
Jenny: Your risk and your max profit should add up to equal the width of the butterfly on one side, because you're never going to lose them, here you got a call spread and a put spread, you're never going to lose them on both sides, it would just be on one.
Liz: Let's put this in [ship it 00:11:51], then let's talk about what we're going to do with this. This is an iron fly we used, sold the straddle and bought the wings. You can look at it, you could price it on the other side. Here's what I'm going to do, if I collected two twenty-five, I'm going to put a GTC order in to buy back my straddle, not my wings, my straddle for a certain price.
Jenny: A certain price. You don't think you'll do it for the whole package?
Liz: I mean you could do it for the whole package.
Jenny: It depends on which way it's moving.
Liz: I might put the GTC order in for the straddle because buying back the straddle will be easier than buying back the package at a price that I'm happy with. Then I would reassess, because if it moves up or down, you might need one of those long options.
Jenny: Yeah you're going to have to keep an eye on it. You're going to have to keep an eye on it, if it says right here, sure we'll buy back the straddle. If it's moving one way, say it's moving down, well that downside put is getting more money then you need that put, yeah you need that put. If we sell this for two twenty-five
Liz: Then maybe you should put the whole package in, but just keep an eye on it, if it makes sense, cancel replace and just use the shorts, do the short.
Jenny: If we sold this for two twenty-five, fifty percent of that would be a dollar twelve, and I'd be happy with half of that so let's say about fifty-five cents. I'd be happy with fifty-fiv cents out of this trade.
Liz: Yeah that's fine, that's great. A lot of times it's interesting because this is defined risk and because it's almost, we called it a big dog but it's technically a chicken, because it's close to fifty percent the width of the strikes, this would be something because it's so defined, I'd be opted to take a little bit more out of.
Jenny: Oh take more out of it and just leave it?
Liz: Take more out of it but it doesn't matter either way. Let's talk about that, that's why GTC orders stop you from being greedy.
Jenny: You see this call is an iron condor it's closed and called an iron condor it's really an iron …
Liz: It is it's an iron condor with the same short strikes.
Jenny: Do you leave this, do you sit on this till expiration and hope it stays right around here? I guess it depends on how much times has passed. If I can close this and take fifty five cent out of it in a couple weeks, then great because this is a November position. If I put in an order to buy this, and all I'm going to do is highlight, hold down control and highlight every line, create closing order, but this iron condor back. We just sold it for two twenty-five, and if I can buy it back for a dollar seventy
Liz: Take a [fill 00:14:08] and don't look back. You have to put realistic parameters around things. If you're risking two hundred and seventy-five dollars to find risk on something, yeah you could make your fill profit if it expires here.
Jenny: Right, or if it stays right around here, but if I could get out of this much quicker all we're looking for is, days to pass or volatility to come down a little bit.
Liz: That's not even the game, I guess if this were my only trade, then maybe I would want to take more out of it. That's why we do this, day after day, after day is I want the fifty dollars off the table, because if you have that much of a gain it can easily turn into a lose.
Jenny: Yeah and so you'll see that during "Know Your Options", we're going to look at a couple trades. Apple's one of them, it was a winner then a loser, then a winner and a loser. Finally it's a winner, we're closing it today. So think about it, if, when it was a winner we closed it, and then it was a loser we could reload and then it was a winner again, close it again. Where I would rather get in and out, in and out, in and out, and put it on one trade and hold it for fifty days.
Liz: Take your risk off the table and risk off the table, and other people … that's the name of the game. We want these occurrences, we want take our profit off the table. We say time and time again, every trade has the potential to be profitable, at some point during the cycle and also has the great potential to not be profitable at some point during the cycle, or a lose.
Jenny: Right so when we're looking at probability, the probability are high at some point in the cycle, taking a winner a some point in the cycle, so we take our winners when we can. I think it makes more sense.
Liz: I agree.
Jenny: Talking about those GTC orders we had a couple of emails on. I set the limit or I set the price to whatever price we want. We sold it for two twenty-five, we're going to pay a dollar seventy to buy it back.
Liz: You know what, just for a learning exercise, will you just go in and show them how you got to this, to buy it back?
Jenny: Sure we can go to the monitor page.
Liz: Just because we have one minute and I think this is worth kind of running through and then we can refer people to here.
Jenny: EEM, here it is on the monitor page. Just going to hold down control and highlight each leg, then right click create closing order, buy one and then you set the price and-
Liz: You'll notice it was the price we just sold it for so we don't want to buy it there we want to make sure we're putting in our order and locking it.
Jenny: This GTC means, good till cancel, so this order will go in everyday until I cancel this order.
Liz: Right so that good till cancel order we will never put an opening order in. Never put an opening order in good till cancel because markets move thought out the night and sometimes there's, the morning, the opening sometimes get a little bit different. I don't want a, I never have a GTC order in. I never have a GTC order in for opening positions.
Jenny: I want to just put his butterfly in on one side, put or call, or am I out of time?
Liz: You have one minute. You can do it.
Jenny: Okay, just quickly, just to show how it should be the same. If I did all puts, it should be the same.
Liz: Or close because it does take into account [inaudible 00:17:02] markets.
Jenny: Yeah it's the same. Two seventy-three, they're … Well that's the debit
Liz: No see exactly it is the same, because two seventy … It's the exact, this is your risk
Jenny: It's like you're paying for it, what you're paying for it is your risk and your max profit is the other side of it.
Liz: Exactly, it's exactly the same.
Jenny: So it should be the same, whether you do all puts all call or the iron butterfly it's all the same.
Liz: Alright so we're going to take a quick break. We just opened both phone lines, they are both open so give us a call. 855-238-2789 or 855-be-tasty.