Building Positions in a Small Account

Key Concepts

• Options Trading Strategies: Short Call Spreads, Short Put Spreads, Iron Condors, Diagonal Spreads, Wheel Strategy, Call Ratio Spreads.
• Implied Volatility (IV): A measure of the market's expectation of future price fluctuations. IV Rank is used to assess relative volatility.
• Delta: A measure of an option's sensitivity to changes in the underlying asset's price.
• Skew: The difference in implied volatility between options with different strike prices.
• Buying Power: The amount of capital required to enter and maintain a trading position.
• Defined Risk: Strategies where the maximum potential loss is known upfront.
• Earnings Plays: Trading strategies based on anticipated price movements around earnings announcements.
• Johnny Trades/Tasty Trades Account Size: Refers to smaller, defined-risk trading accounts.

Portfolio Review & Trade Execution – Johnny Trades Segment

This segment details a review of an existing options portfolio and the execution of new trades, tailored for a smaller account size ("Johnny Trades"). The focus is on managing risk, capitalizing on volatility, and implementing various options strategies.

1. Existing Portfolio Assessment

The trader begins by reviewing the current portfolio, noting the following:

• Cisco (Short Call Spread): A previously established short call spread on Cisco, initiated before earnings, has reached its maximum loss and is being closed out for a full profit. This frees up capital.
• Netflix (Short Put Spread): A short put spread on Netflix is currently losing money, expiring next week. It’s being held, but acknowledged as a challenging position.
• Overall Portfolio: The majority of positions are flat, with only minor losses on Netflix.

2. Trade Selection Criteria & Discussion

The trader outlines the criteria for selecting new trades, prioritizing:

• Higher Implied Volatility (IV): Seeking stocks with elevated IV to maximize premium collection.
• Smaller Price Stocks: Favoring lower-priced stocks to reduce capital requirements.
• Defined Risk: Emphasizing strategies with limited downside risk, suitable for smaller accounts.

Several potential tickers are discussed:

• USO (United States Oil Fund): Considered due to prior trading activity.
• SLV (iShares Silver Trust): Another previously traded asset.
• HIMS (Hims & Hers Health, Inc.): Identified as a smaller-priced stock with high IV.
• IBIT (iShares Bitcoin Trust): Mentioned but deemed potentially unsuitable for the account size.
• DKNG (DraftKings Inc.): Highlighted as an attractive earnings play due to its recent price decline.
• ORCL (Oracle Corporation): The trader is personally long Oracle and seeks to benefit from a price increase.
• TSM (Taiwan Semiconductor Manufacturing): Considered but ultimately deemed too expensive for the account size.
• GM (General Motors): Identified as a potential short call spread candidate due to its recent upward trend.

3. DraftKings (DKNG) – Earnings Play (Put Spread)

The primary focus shifts to DraftKings, with a plan to implement a short put spread ahead of earnings.

• Rationale: The stock is near its lows, offering a potentially favorable entry point. The strategy involves selling a put option with the intention of either collecting the premium if the stock price remains above the strike price or being assigned the stock at a lower price and subsequently "wheeling" it (selling covered calls).
• Strike Price & Expiration: The trader initially considers the $25 strike price with weekly expiration.
• Premium & Risk Assessment: The expected move is $2.50, yielding approximately $0.40 in premium. Moving to the 8-day expiration could potentially double the premium to around $1.00.
• Risk Mitigation: Acknowledging the potential for a significant downside move ("anything is possible" given DraftKings' volatility), the trader proceeds with caution.
• Execution: The trade is executed at the $25 strike price, receiving a credit of approximately $0.75. The trader emphasizes the importance of avoiding a large gap down on the open.

4. Oracle (ORCL) – Neutral Strategy (Iron Condor)

To balance the portfolio, a neutral strategy is implemented on Oracle:

• Strategy: An Iron Condor is chosen to profit from limited price movement.
• Strike Prices & Expiration: The trader sells a call spread (19200 call) and a put spread (135125 put) with a March 9th expiration.
• Delta & Skew: The position is designed to be delta-neutral, with a significant skew in implied volatility between the call and put sides (approximately $20 difference).
• Execution: The trade is executed above the mid-price, collecting approximately $300 in premium with a risk of around $700.

5. GM (General Motors) – Bearish Play (Call Spread)

A small bearish position is added with General Motors:

• Strategy: A call spread is sold to profit from a potential decline or limited upside in GM.
• Strike Prices & Expiration: A $5 wide call spread is sold.
• Execution: The trade is executed, collecting approximately $400 in premium with a risk of around $400.

6. Bitcoin (IBIT) – Diagonal Spread

Finally, a diagonal spread is implemented on IBIT:

• Strategy: A diagonal spread is chosen to capitalize on potential upside while limiting downside risk.
• Strike Prices & Expiration: A March/May spread is used, buying a March call and selling a May call.
• Rationale: The trader believes the position will move slowly and allows for potential rolling of the position.
• Execution: The trade is executed at a credit of $260.

7. Portfolio Summary & Risk Assessment

The trader summarizes the completed trades:

• Net Position: The portfolio is slightly net long.
• Risk Distribution: The Oracle position represents the largest overall risk, while the DraftKings position poses the most immediate short-term risk.
• Delta Neutrality: The portfolio is generally delta-neutral, aiming to profit from time decay and limited price movement.

Notable Quotes:

• “Anything is possible” – acknowledging the volatility of DraftKings.
• “Calendar’s like kissing your sister. There’s no reason to do this.” – expressing a strong preference for diagonal spreads over calendar spreads.

Technical Terms Explained:

• Iron Condor: A neutral options strategy involving the sale of both a call spread and a put spread.
• Wheel Strategy: A strategy involving selling cash-secured puts and, if assigned, selling covered calls against the acquired stock.
• Diagonal Spread: An options strategy involving buying and selling options with different strike prices and expiration dates.
• Skew: The difference in implied volatility between options with different strike prices.

Conclusion:

This segment demonstrates a practical approach to options trading within the constraints of a smaller account. The trader emphasizes defined risk, volatility selection, and diversification through a combination of directional and neutral strategies. The focus on earnings plays and the willingness to adapt based on market conditions highlight a dynamic and opportunistic trading style. The successful execution of multiple trades showcases the trader’s ability to identify and capitalize on potential opportunities while managing risk effectively.