The Trading Strategy that Can Catch Major News Moves (Very relevant in todays markets)

Options Workshop with SMB Capital

Let me ask you a quick question how do you feel when you see a stock make a huge move up or crash lower on major news but you’re sitting on the sidelines not catching any of it obviously no trader enjoys being in that situation although what ifs and the could haves consume your thoughts but the reality in trading is that most major news reports are unpredictable

For the independent trader and you have no edge in trying to guess which way a stock will go but what if they’re a way to eliminate having to guess the direction and still be able to capture a major move and a stock if it occurs regardless of whether it goes up or down if that’s something you’d be interested in then this video is for you foreign berg and i’m

The head trader of smb capitals options trading desk smb capital is a proprietary trading firm located in midtown manhattan and we provide capital for options and equity traders from all over the world trading both remotely and in our offices here in new york city now i’d like to suggest that you click on our subscribe button right now so that you don’t miss any

Of our free trading videos that we produce for traders and investors all over the world they’re really valuable okay so undoubtedly 2022 will go down in history as the year of surging inflation and anyone involved in the markets in any way knows that the market is going to respond dramatically to any news involving inflation whether it’s the monthly consumer price

Index announcement or any news about how the fed will be tightening monetary policy to try to quell the surging inflation that’s plaguing the worldwide economy and so as every trader knows along with dramatic price movement become dramatic trading opportunities and the unique thing about using option strategies to play dramatic market moves is that with the right

Strategy you won’t need to predict how the market will react to a major inflation report in order to win the trade you see there are in fact option strategies where you’ll make a respectable amount of money in most cases but at the same time you set yourself up for potentially spectacular win if the trade plays out in a certain way so in this video we’re going to

Be teaching you a strategy that works just like that but before we delve into that i wanted to let you know that if you’d like to learn three more option strategies that our pro traders use all the time including the unique options trick that allows you to make money while you wait to buy stocks or etfs at the price you want and the options income strategy that

Allows you to make consistent money whether the market goes up down or sideways and how to make money on a stock or index trade even if you’re outright wrong on the direction then click the link that should be appearing now at the top right corner of your screen that will open the free workshop registration page in a new window so don’t worry you won’t lose this

Video or you can register directly for free at believe me you don’t want to miss this so pause this video sign up now and then resume watching in order to teach you this strategy for playing major inflation reports like the monthly cpi and announcement we’ve got to make sure that you understand how index options work because those are the kinds of

Options we’ll be using in this example now some of you may not fully understand how index options work so we’re going to do a really quick review of them and for those of you familiar with how they work just hang in there this is going to be really quick and then we’ll just jump right back into teaching you the strategy all right so the best way to understand index

See also  Why is the APR Different From the Rate?

Options is to think of them as bets what are known as call options pay off if an index closes above what’s known the strike price of the option on the day that the option expires if the index does close above that price on expiration day then the call buyer gets 100 in cash per point that the market closes above that call strike price a put option is the opposite

It pays off if the market closes below the strike price of the put option again 100 per point that the market closes below the strike price of the put so for example if an index closed captioning not available okay so with that said let’s head back to september 15th of this year which is two days after the last monthly cpi report was released and as you can see

After the spx index had gotten below 36.50 in june it rallied back in just a few days before the cpi report was released in september it was sitting up over 4 100 after which the market reacted negatively to the cpi report resulting in a drop back under four thousand and so looking forward to the next cpi report which was scheduled to be released on october 13th

About a month later let’s say that a trader decided that he wanted to set up a trade that would make a modest amount of money if the market rallied off of the next cpi report to be issued in october but could make a great deal of money if the market were to sell off after the report now with most trading instruments that wouldn’t really be possible that you could

Make money on the trade 8 whether the market rallied or sold off but with options there’s a strategy that actually works that way and so let’s take a look at an example of how this could have been structured so let’s say that on september 15th we pulled up an options chain expiring a few days after the next cpi report which is coming out in october and that would

Be the october 14th options chain and we went ahead and bought 10 of the 3640 puts which are located just above the lows for the year which is intentional as you’ll see later and at the same time we sell 20 of the 35 90 puts expiring the same day which is located 50 points below and finally we buy 10 of the 35 10 puts also expiring that same day and so when he

Executes this particular formation of options it’s called a broken wing butterfly to options traders and it’s a very useful trade once you understand its dynamics now let’s first off dig into the cash flow of the strategy when you enter it so you’ll understand exactly how this works so let’s start out with the options we sold those 20 puts down at 35.90 and as you

Can see from the calculation we sold those for 28.35 and as we discussed earlier each point below 35.90 is worth 100 so you multiply that price by 100 and we sold 20 of them and so when you multiply it all out the result is we actually got in forty thousand seven hundred dollars in cash and that flows right into your account but then remember we also bought 10 of

The 3640 puts which as you can see from the calculation cost us twenty six thousand two fifty and we also bought 10 of those 35 10 puts which cost thirteen thousand eight fifty using the same kind of logic and so the resultant cash we collected by entering into this trade was six hundred dollars and your broker will require you to have at least twenty nine thousand

See also  The Great Depression and New Deal 1929-1940

Four hundred in your account in order for you to enter in the into this trade in the first place which is also the trades worst case scenario the way that this trade was designed was intentional you see the lowest closing price of the year for spx was 36.66 and you’ll notice that all of the options comprising this broken wing butterfly trade the 3590 the 3640 and

The 3510 all of those are located below that 36.66 price for the year and so if the index simply closes above its lows for the year then all of the options comprising the broken wing butterfly expire worthless and the trade simply walk trader simply walks away with that six hundred dollars that he collected initially when he entered into the trade because there’s

No value to a put on expiration day if the strike price price of the put is located below the index’s value as we discussed earlier but that’s not exactly what happened in this case what happened actually in this case is a lot more interesting and that is that we need to move forward to the day that the cpi report was issued which was october 13th and as you can see

The market rallied strongly off of the report closing up at 36.69 that day which happens to be the day before our broken wing butterfly trade expires so this rally gave us a wonderful opportunity you see at the end of that day the trader closed almost the entire position selling seven of the 36 40s leaving three of those and buying back all of the 20 35 90 puts he

Sold and selling all of the 10 35 10 puts that he originally bought and so when he does that the result is that the only remaining remnant of the original position is actually those three long 3640 puts that he still owns and in a minute you’ll see why he left those three puts in place and didn’t sell those off but before we do that let’s first see where that leaves

Us from a cash flow standpoint after he traded out of most of the position the day before it expires and so starting with the original cash flow we received when we first entered into the broken wing butterfly that original six hundred dollars we then add to that the proceeds of selling seven of the ten thirty six forty puts which on that day were selling for 15.75

So as you can see from that calculation we received eleven thousand twenty five dollars for those but we had to turn around and pay eleven thousand four hundred to buy back the 20 puts at 35.90 and then finally we received 11.50 for selling off all of the 25 10 puts we had originally bought resulting in a new positive cash flow for the trade in the amount of 13.75.

And that’s significant because remember we originally collected six hundred dollars for enter entering the trade but now our cash flow has increased to 13.75 and what’s so important about that is that the trade has now become risk free why well think about it the next day when the trade expires if the index closes above the 3640 puts then they just expire worthless

And the trader just pockets the 1375 and cash that he’s collected but if the index closes below 36.40 then those puts will settle with some value as we discussed earlier one hundred dollars per point below the strike price of the option for each of the three options so in other words at any price the position will have a profit of at least 13.75 with the potential

For more if the index closes below 36.40. so if you think about it the trade is now risk-free and those three 3640 puts are kind of like lottery tickets should there be a sell-off the next day and so let’s move now to that next day and as you can see the index closed at 35 8307 it sold off in other words and that’s a 56.93 points per below the strike price of

See also  70 million Americans set to receive increased social security benefits | ABCNL

The three thirty six forty puts that we kept open and so at this point those final puts can be valued and as you can see starting with that positive cash flow that we had accumulated already during the course of the trade then all we do is simply add to it the settlement value of the three remaining puts and the way you figure that out is you take the put strike

Price of 36.40 you subtract out how much that option closed in the money which as you can see is 56.93 and then you multiply that by 100 because those are worth a hundred dollars per point and of course we retained three of those and so when you multiply it all out you end up with an additional seventeen thousand seventy nine dollars for grand total of positive

Cash flow of eighteen thousand four fifty four which comes out to a return of 62.7 percent in just a month and so what i’d like you to take away from today’s video is that the broken wing butterfly strategy if you locate it intelligently it provides an incredible opportunity for a trading win in its original form at the same time depending upon how the trade plays

Out there’s a way that you can pull all of the risk out of that trade as we did in this case by trading out of most of the trade while leaving a few puts in play as what we would call lottery tickets should the market take a hard move downward as it happened to do in this case resulting in a spectacular outcome but regardless of whether that lottery ticket comes

Through for us or not the fact is that the trade had a very high probability of winning as originally structured and turned risk-free with an even higher floor of profit towards the end of the trade while re retaining that lottery ticket potential which as it did in this case will come through now and then with sometimes amazing results adults as you become a more

Experienced options trader you’ll begin to recognize these kinds of opportunities regularly now just to remind you if you’re serious about your trading you’ll need to check out the free intensive options class that we’re currently running where you’ll learn three real world option strategies that our professional traders use all the time just click the link that

Should be appearing now at the top right corner of your screen or you can just head on over to to register for this free workshop directly it really is a rare opportunity for retail traders and investors to learn directly from wall street traders but that’s exactly what you’ll be getting through this free online workshop so click the link to sign

Up now before you miss it so now you know how to trade a major breaking news event which is super important for this current market environment that has numerous market moving inflation reports but this strategy won’t get you to consistent profitability by itself because these reports don’t happen daily or weekly so what do you do if you want a more steady strategy

That can bring consistent income well that’s answered in the video that’s appearing on your screen right now and it has to do with trading weekly options so make sure to check it out if becoming consistently profitable trader is your goal

Transcribed from video
The Trading Strategy that Can Catch Major News Moves (Very relevant in today's markets) By SMB Capital