Let me show the Correct Way to Trade Bond Futures
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What's up everybody? It's Jonathan. Today we're going to talk about scalping gamma. I'm going to walk you through an example in KEM, K-E-M. Now in my opinion, learning how to scalp gamma, learning how to manage your position, is probably the most important thing for any trader learning how to trade stock options. It's an absolute necessity. So let me walk you through an example of a trade that we shared June 11th, today July second. So June 11th, we shared an idea in KEM, K-E-M.
The trade that was shared was buying one July 24 straight call. 60 cents. Let's use the example of a one lot, it's $60. You can never lose more than $60. We're also buying one July 21st straight put. 50 cents. Risk $50, you can never lose more. So if you do both sides of the trade, if you do a one lot, it's $110. If you do a 10 lot, it's $1,100, but let's use the example of a one lot. I highlighted the area of the trade, but I also made a line on the 24th strike. Now I probably could do the same thing on the 21 strike, but the stock never traded down there so don't worry about it.
Buying one July 21 strike put allows you to be short at 21 if the markets under 21. The market's not under 21 so it doesn't matter. They're worthless. We have the option to be short. We're going to choose not to be short because the price of the stock right now is $25.67. So let's just worry about the 24 strike call. And I'm going to show you how professional traders would manage this trade. Again, we have $110 of risk, right now when we put the position on. So here we go. Right away there's volatility. But it's not really helping us very much because it's not moving away from our strike.
But all of the sudden we start to rally. So now the 24 strikes are in the money. Now again the 21 strikes, ignore them. We're nowhere close. The 24 strikes are in the money fine. They're doing well. What I suggest, what I teach, 25, we're up $1 where we have $1 of intrinsic value in those 24 strikes. So what I'm always going to suggest that people do, sell 30 shares of stock. Sell 30 shares of the underlying stock of KEM. If you sell them for $25 at the price of $25, your position, you're still long one. You never touched your options. Now you're short 30 shares of the underlying stock. The reason we do this is because being long one of a 24 strike calls, it's the same thing as being long 100 shares of KEM once we're in the money.
So if I sell 30 right here, we're long one call short 30 shares of stock. Let's just trade whole numbers for this example. So now we just hold. We're not doing anything. It looks like it's coming off. We didn't get filled, fine. It still doesn't do anything, doesn't do anything. Comes back down to 24. We make $1 on this trade. Let's cover. Sold 30. Let's buy 30 shares back. So we make $1. So we just made $30. So if we go back to our original trade, we've risked $110, we've taken 30 off the table, so now we have $80 of risk. Rallies again to 25. Let's sell 30 shares again.
Jonathan Rose: We're scalping gamma. That's what we're doing. Wow. It keeps on rallying to 26. Okay, great. Let's sell 30 shares again. So we sell 30. We sell 30. If it keeps going higher, great problem to have, because we're long one call. The equivalent of 100 shares, we sold 30, we sold 30, so we're still long in essence 40 shares of stock. As the market turns and comes back off, buy 60 back. Buy them all back. So what do we do now? We buy 60 back, sell 30, sell 30, so we make $2 on 30 of them. That's 60. And we made 30 on these. So we just made $90.
Why do we manage an options trade like this? Well when your long options, what's your risk? Your risk is premium coming out of your options. Theta, decaying. What's the opposite of Theta? Glad you asked. It's gamma. Why are we scalp gamma? We scalp gamma to make back that Theta. We need to know this if you're risking money in the options market and you haven't learned this yet. You're learning the wrong thing. This is the stuff that we need you to learn.
Jonathan Rose: You have any questions, [email protected]
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