🔍
Which Bullish Option Spread Should I Trade? - Options Trading Strategies - YouTube
Channel: Option Alpha
[0]
Hey everyone.
[1]
This is Kirk, here again at optionalpha.com
where we show you how to make smarter trades.
[5]
In today's video, we want to talk about how
you decide between doing a bullish trade in
[10]
a debit spread or a credit spread format.
[14]
If you’ve decided that you're bullish on
some future direction of a stock or ETF, that’s
[19]
great, but should you choose to trade a debit
spread or a credit spread…
[23]
And often, this is a question that I get so
many times from our members and from students
[29]
that I coach, is that they just don’t know
which way to go with a debit spread or with
[35]
a credit spread.
[36]
In this video, we’ll help you figure out
which strategy is best for the current market
[41]
and it all starts by analyzing current IV
rank or percentile.
[47]
As we always say and as we definitely have
in our downloadable PDF strategy guide which
[51]
you can find at optionalpha.com is that it
all starts with understanding where you think
[57]
the market might go.
[58]
In this case, we’re already bullish, so
that's good.
[61]
The next step is to determine where implied
volatility is because volatility is our edge
[66]
in the market trading options, so we want
to have a good understanding of where implied
[70]
volatility is.
[71]
I have two examples that we’re going to
go through here tonight on our Thinkorswim
[75]
platform.
[77]
The first example is EEM and this is an emerging
market’s ETF.
[81]
Let’s just say that for some reason, you’re
directionally bullish on this stock.
[86]
It did have a pretty good breakout today and
MACD and some of the other technical indicators
[92]
are definitely pointing towards a higher move.
[95]
I agree that it could be a play for the bullish
direction.
[99]
It could be a move higher in the next couple
of weeks.
[103]
But now, the question is – Do we do a debit
spread or a credit spread?
[108]
In this case, we’re going to choose to do
a debit spread because implied volatility
[113]
is very low.
[114]
You can see that the IV percentile here or
the IV rank is at 35 and that means that historically,
[123]
going back over the last year, implied volatility
is usually higher than where it is right now.
[130]
It's only lower about 35% of the time.
[134]
You can see here graphically this purple line
on the chart, this is IV percentile and you
[139]
can see just going back here historically
over the last year that a lot of times, implied
[144]
volatility has actually been much higher than
it is right now, so we’re actually getting
[149]
into the market during a relatively low period
in implied volatility.
[155]
As options traders, we want to target or focus
our trades on the strategies that work for
[162]
this market.
[164]
The two things that we know absolutely at
this point is that the stock may go higher,
[168]
I guess we don’t know absolutely if stocks
can go higher, but we assume that the stock
[172]
is going to go higher and we know that implied
volatility is low.
[175]
In this case, we want to choose a debit call
spread which would take advantage of the lower
[181]
implied volatility market and the relatively
cheap options that are out there.
[187]
The other trade that we want to go over today
is XLU.
[192]
XLU is a utilities ETF for the spiders.
[198]
We’re sticking with the ETFs here.
[200]
You can build the case for the fact that this
stock has continued to move up all throughout
[204]
the end of last year, in the beginning of
this year and in May, it break out here from
[209]
the 49/50 range that it's currently in.
[212]
Same thing that the indicators are still showing,
that it could be continuing higher from here,
[217]
so I get that the stock could move higher.
[219]
The next question is – Where is implied
volatility?
[222]
We can see visually on the chart with our
code here that implied volatility is in the
[228]
76th percentile.
[230]
What that means is that 76% of the time over
the last year, implied volatility has been
[235]
lower than it is right now.
[238]
You can see visually on the charts just using
this dot and going backwards in time here
[243]
that the vast majority of the time over the
last year, implied volatility has been much
[248]
lower than its current reading.
[251]
As options traders, we can take advantage
of this by selling options as part of a credit
[256]
spread strategy.
[257]
In this case, we would sell a put credit spread
below the market and take advantage of the
[263]
rich implied volatility premium that's already
in the market.
[267]
That’s one way that we can decide on which
strategy we choose.
[272]
Remember, when it comes down to picking whether
you choose a debit spread or a credit spread,
[277]
it’s all about analyzing current implied
volatility in the market.
[282]
If you guys have any questions or comments
about this video, please ask them right below
[286]
in the comment section for this lesson page.
[288]
Until next time, happy trading!
Most Recent Videos:
You can go back to the homepage right here: Homepage