The following is just my opinion, I’m not a financial adviser. The stock market is full of risk, and you may lose money. This is intended to be an educational blog that explains how to trade options in various equities, and help others learn how to trade stocks.
I learned about how to trade options from opening a Tastyworks account. It is a whole multi media network that is dedicated to helping retail investors learn about investing. You can open an account there for zero dollars, and get access to education and content that you just cannot get anywhere else. Its is free, so you really have nothing to lose.
Real Estate ETF
ETF NAME – iShares US Real Estate ETF
TICKER – IYR
MY OPINION (JUST MY THOUGHTS, NOT ADVICE) – Bullish. I believe that IYR is going to go up from here
STRATEGY USED – I sold a PUT spread, and bought a CALL spread. I learned this strategy from the traders at Tastyworks.
My Thoughts On
I regularly use the charting tools at Finviz.com to see what trends are in the stock market. To me, it looks like the iShares US Real Estate ETF – IYR is about to break out.
Sell a Put Spread to Finance a Call Spread
I like to trade highly liquid stocks and ETF’s High volume and a close bid/ask spread make for easier trading. As you can see below, IYR gets a 4 out of 4 stars from Tastyworks for liquidity.
Even though I executed the trade in a single transaction, I broke it down for your here. Below I show you how I sold the put spread.
I chose to sell the 79/83 put spread for September 21st 2018 expiration, about 36 days until expiration. I sold the 83 put, and bought the 79 put. I collected .88 per share. Each contract represents 100 shares, so you multiply that by 100, so I collected $88.
If I did this trade by itself, it would break down like this, as shown in the picture below.
Max Profit – $88 – If IYR is above $83 at expiration, the put spread I sold would be worthless. I get to keep all of my premium. You DO NOT HAVE TO HOLD UNTIL EXPIRATION. If you are seeing some nice returns and you want your money prior to expiration, I just buy the spread back, for less than what you sold it for.
Max – Loss – 312 – If IYR is below $79 at expiration, this is the most I would lose. It is calculated by the strike price of the put I sold, less the strike price of the put I bought, less the premium collected per share, then multiplied by 100, since each contract represents 100 shares. (83 – 79 – .88) x 100 shares = $312
The second part of this trade is to buy the vertical call spread. Again, I did this in one transaction, but I am breaking it down, just for explanation.
Using the same September 21st 2018 expiration date, I bought the 81/83 call spread, for about $134.
If I did this trade alone, I would have paid $1.34 per share, multiplied by 100, so total would be $134.
For this, my max profit would be $66. Max Profit would be realized if IYR is above 83 at expiration. You DO NOT HAVE TO HOLD UNTIL EXPIRATION. You can realize this trade at any time prior to expiration, 99% of the time, I sell about 15 days prior. It is calculated by the Strike price of the Short call, less the price of the long call, less the premium I paid to buy the spread, multiplied by 100. (83 – 81 – 1.34) x 100.
But instead of just paying $134 to buy a vertical spread, I sold a put spread for $88, to I only had to pay $46 ( I actually got filled for less, I only paid $42).
Also, notice I sold a 3 strike wide put spread, but bought a 2 strike wide call spread. You don’t always have to do that, you can vary the strike widths, and prices as you see fit. The tools and education I learned at Tastyworks makes it unbelievably simple to understand. You can open an account with zero dollars, and get a free education until you are ready to trade.
I am hoping that IYR goes up, above my call spread, and I would sell it for $200. So all in all, best case scenario I bought for $42 and sell for $200. I can do that all day.
If my assumption is incorrect, and I don’t exit the trade, I my max loss would be 300, plus the $46 I paid for this whole trade. But I will monitor my position, and will not let it go to max loss. There are many ways to minimize your losses, and if I start losing money, I’ll explain how I got out of it. More often than not, you can use the tools that the traders at Tastyworks gives you to actually still make money, or at least lose zero.
You can sign up for an account, and not even fund it, to get the tools that I am talking about. But you have to have money in your account if you actually want to trade.
Take a look around, you will see that Tastyworks is a brokerage built buy stock option traders, for stock option traders. They don’t charge you a ton of fees like other brokerages, in fact, there are ZERO FEES TO CLOSE a position. Anybody who has been trading a while knows how those buy and sell fees eat up your account pretty fast.
Tastyworks has very low fees to open a position, and currently charges zero fees to close. That alone will save you thousands of dollars a year, allowing a smaller account to turn in to a bigger account really fast.
Like I say TopJunkies is a blog about stock trading for beginners, experienced traders, or anybody who wants to learn about investing in the stock market. I’d like to hear from you, if you have anything (good or bad) to say, I’d love to hear it. Leave a comment below.
UPDATE 8/20/2018 – I closed this postion, I sold it for $91. More than doubled my money! I’ll do that all day if I can.