how much does NFL make

Just How Much Money Does the NFL Really Make?

With the Thanksgiving holiday upon us, many Americans are close to partaking in a favorite leisurely past time: Eating turkey, falling asleep and watching football. Turkey Day isn’t just a day full a food, but also NFL football, as six teams will duke it out from 12:30 pm ET to around midnight.

For some fans, these teams — Detroit vs. Chicago, Atlanta vs. New Orleans and Dallas vs. Washington — will be their local favorites squaring off in divisional battles. For much of the country though, these national games will be running in the background, in and out of focus as families gather around the table and share some grub.

It’s got some observers wondering though, just how much money does the NFL make? How much are these teams worth? Who runs the NFL?

So as our part of the Thanksgiving tradition, we here at Option Party felt we would do our holiday part to bring you the financial side of the NFL. Who knows, maybe that will give you something to talk about at the table this year.

Is the NFL Rolling in Dough?

Figuratively, yes.

Of the four major sports in the United States, the NFL is the clear leader. In 2016, the NFL reportedly generated revenue of more than $13 billion. The next highest earner in the U.S. was Major League Baseball, generating $9.5 billion in sales and the NBA at $4.8 billion.

Although those figures have trended higher, the NFL remains dominate. But because the league is a privately-held entity, getting data on the league’s financials is not that easy. After digging through countless income statements, balance sheets and 10-Ks, we sometimes take for granted the transparency that comes with public companies.

But lo and behold one team — the Green Bay Packers — are publicly owned. Well, at least to some degree. In any manner, this gives us a better peak into the financial world of the NFL. So for 2017, we found out that the NFL had generated over $8 billion in shareable revenue to its teams. That comes out to roughly $255 million per team.

In fact, the league has found a way to steadily increase revenue each year. That may surprise many fans, who know attendance has stagnated and protests have hindered ratings. However, the NFL remains a star for networks, as television networks contend with a swath of cable-cutting consumers who prefer to watch Netflix rather than ABC.

Perhaps that will come into play during the NFL’s future contract negotiations with broadcasters like ESPN, Fox, CBS, ABC and NBC. But so far, the league’s decisions — like Thursday Night Football — have paid massive dividends.

How much does NFL make

According to Statistica, the NFL brought in total revenue of $13.68 billion last year. It’s a significant increase from the ~$9.6 billion in revenue it generated just four years prior in 2013. In 2007, before the financial crisis, the NFL generated ~$7.1 billion in sales. So while some may believe that the NFL is on the brink of demise, that’s far from the case.

Given the steady increase in revenue, owners have reaped plenty of profit and made their top assets that much more valuable. The three most valuable franchises are the Dallas Cowboys, New England Patriots and New York Giants at $5 billion, $3.8 billion and $3.3 billion, respectively. The Cowboys are also the highest valued across all four major U.S. sports leagues.

Even the three least valuable franchises are still worth a pretty penny. The Cincinnati Bengals, Detroit Lions and Buffalo Bills are worth $1.8 billion, $1.7 billion and $1.6 billion, respectively. That’s vastly more than the most valuable NHL team, the New York Rangers, at $1.2 billion.

Players Are Cashing In, Too

As network deals and NFL revenue continue higher, so too do the salary caps. Specifically, the salary cap has increased by 44% over the past five years, leading to a tidal wave of big-time contracts.

Green Bay Packers quarterback Aaron Rodgers inked the NFL’s largest contract in August 2018. His contract is for four years and $134 million, while his salary and bonuses near $67 million in the first year alone. Both are records, but will surely be broken over time. For instance, the NFL’s top-10 earners this year will pull in $424 million in compensation this year. That’s up a tremendous 43% from 2017!

So while the players may not like the short turnaround time of playing on Thursday night, they’re clearly seeing it in their checks.

Finally, the players and teams aren’t the only ones raking in the cash. Don’t forget about NFL commissioner Roger Goodell. While far from a fan favorite, the owners love Goodell. He has helped navigate the league to where it is today and lined their pockets with profits. After becoming commissioner in 2006, Goodell earned a reported $212.5 million in his first ten years on the job. In December 2017, he signed a contract extension for five years and up to $200 million if he hits his incentives. 

Suffice to say, cabbage might not be on the menu for Thanksgiving dinner, but there’s plenty to go around in the NFL.

Here’s How to Trade the Bull Call Spread

The one thing options trading doesn’t lack is versatility. Investors can trade for upside, downside and neutral price action. They can bet on time decay, fluctuating volatility and angle for protection. But one of the many options strategies that investors should be familiar with is the bull call spread.

The bull call spread allows investors to take advantage of upside, while limiting the amount of capital that’s required for the trade. At its core, a bull call spread is a combination of buying one long call and selling one short call against it. Specifically, it requires that we buy a lower-strike call and sell a higher-strike call both of the same expiration.

The bull call spread is a directional upside bet that the underlying security will move higher between now and expiration. Many investors prefer to trade bull call spreads instead of naked long calls due to the risk profile. Meaning that, by buying a call spread rather than just a long call, investors pay a lower premium.

Let’s look at a more specific example.

Breaking Down the Bull Call Spread

Say we’re bullish on shares of ABC, which currently trades at $83. Some options traders would consider buying the $85 call if they were looking for more upside. For a call that expires in 38 days, it currently trades for $3.20.

Obviously the price of that option will fluctuate on a daily basis — and even on a tick-by-tick basis — over the next 38 days until we get to expiration. Should we still be holding the call on expiration, we would need ABC stock to not only get above $85, but we would need it get above $88.20 to make money. In other words, we need the stock to rally by more than 6% in about five weeks in order to make a profit. Our total risk on the trade is the net debit that we paid, or $3.20 ($320).

However, we can turn this bullish trade into a bull call spread by selling an upside call in combination with our long call trade. For instance, if we sell the $90 call with the same expiration against our $85 call, we can collect a credit of $1.30. That may not seem like much, but it drops our net debit all the way to $1.90, a 40% reduction from the $3.20 net debit we pay by only going long the $85 call.

As with everything in the stock market, we can’t have our cake and eat it too. The main drawback to using the bull call spread is capping our upside. In this case, if the underlying security gets above $90, we don’t get to partake in any of the upside over that price.

Weighing the Risk vs. Reward of Bull Call Spreads

At this point, it all depends on what the investor wants. Consider the different circumstances for each trade, as laid out below.

bull call spread breakdown

Yes, technically the upside is unlimited for the long call, but realistically that’s not the case. So while the stock could rally to $200 in theory, it’s unlikely that it will happen. However, it’s worth pointing this upside out, because M&A, earnings or breaking news could send ABC shares significantly higher. Traders of call options and bull call spreads will want take that into consideration. They’ll also want to consider how expensive these premiums are because of these events. 

Many traders are aware of the potential reward, but the good ones focus on the risk. In this case, the bull call spread trader takes on 40% less risk to get into the trade vs. the naked long call. Further, ABC only has to get above $86.90 for the trade to breakeven, rather than the $88.20 it needs to achieve for the long call. 

Finally, should ABC close at or above $90 on expiration day, the bull call spread will collect a profit of $3.20, a return of almost 170% on the trade. Ironically, if ABC were to close at $90 on expiration, the owner of the single long call will have a call worth $5 too. Because they had to pay a net debit of $3.20 though, their $1.80 return represents a gain of “just” 56%.

That’s where call-holders lose track of the risk/reward dynamic of bull call spreads. They think too much about the potential upside. As you can see in the chart above, even after a rally to $93 makes the naked call more valuable than the bull call spread, the latter has a better return thanks to its lower net debit. Further, with ABC at $88, the call strategy lost money, while the bull call spread made a more than 57% return.

These are things to consider when choosing between calls and call spreads.

Why Options Pros Are Loving This Market Volatility

Volatility is the name of the game and few are positioned better than options traders when it comes to profiting from it. However, volatility is a double-edged sword for most investors. During periods of high volatility, the market becomes more and more irrational in the short-term, which causes financial and emotional distress. That being said, these bouts of volatility create opportunity as well, allowing investors to gobble up high-quality companies at a discount.

It also allows a well-honed options trader to profit too.

Perhaps one of the most painful transitions in the market is a sudden lurch from a low-volatility market to a high-volatility market. That’s as most investors are caught off-guard. It’s also a key reason why discipline plays such a pivotal role, not just in a trader’s success, but in their survival.

Unlike stock trading, a quick 10% or 15% correction in an individual stock doesn’t just hurt. It can be downright lethal to an options trader depending on their strategy. It could equate to a 100% loss for those holding long calls or puts in the stock. But if they are net short those options, these losses can run into doubles, triples and worse.

So why then are options traders so successful in environments like the one we’re in right now?  

Trading With High Implied Volatility

Unlike a stock price, options prices are inflated when implied volatility is on the rise. It’s one of several inputs that go into calculating an options price. It allows traders to sell strangles, iron condors and credit spreads, and collect much larger premiums than normal. They don’t care about direction so much as they care about the fluctuation in IV.

Others can take advantage too. After days and days of increasing volatility, some investors will surely consider credit and volatility trades.

While a cash-secured put or a covered call — generally considered two basic options trading strategies — are simple, they can lead to respectable returns. For instance, say we’re long 100 shares of ABC or XYZ and don’t plan on parting ways with it any time soon. Selling a covered call may be a great way to collect some inflated premium at a time where implied volatility is high.

Should shares remain under pressure, the value of that covered call will decline, working in the seller’s favor. Should the stock trade flat for a few sessions or even rise slightly but implied volatility falls, then the covered-call seller can also benefit.

The cash-secured put works in a similar manner. Say we’ve been eyeing a long position in ABC or want to add to our XYZ position. After a quick and seemingly overdone decline, put premiums are surely inflated. We can sell a cash-secured put as a result. We’ll either get exercised at what we feel is a temporary bargain price, or that implied volatility will decline and help deflate the put premium and put some coin in the trader’s pocket.

Trading Directionally

When IV is high, option pros make a killing by selling that premium. Meaning that many take on credit trades as opposed to debit trades. The goal here — be it after selling call spreads, put spreads, iron condors, strangles, cash-secured puts, you name it — is to profit from a “volatility crush.” In other words, they’re not playing the security’s price, they’re playing its volatility.

Now, not everyone does that. Traders can also profit from taking on debit trades too. Again, the key here is discipline. During bouts of high IV, those who opt to take on debit spreads are at risk of the very thing credit traders are looking for: a volatility crush.

If IV sinks, debit traders can nail the direction and still end up with losses. This “right call, wrong play” scenario is one of the most frustrating things in the options world. That said, during periods of high IV there are big moves both up and down. 

Option pros who have a successful trading model in these environments can leverage their gains using long options positions. Maybe they know with a high probability that Amazon (AMZN) will fall 3% to 4% as it nears resistance. That can be a 30% to 40% gain using put options.

That said, playing the wrong direction can hurt badly, particularly when the undesired move is fast and furious. Therefore, traders need to be quick and they need to follow their rules. 

The Bottom Line

So why do the pros succeed and regular traders do not?

If the pros don’t trade volatility, they at least know how to evaluate it. They use it to their advantage and many likely have specific systems for these type of environments. Volatility traders and credit traders generally have the biggest smiles on their face during times like this and October was one for the books. That doesn’t mean debit traders can’t profit too, but they may find the waters a bit too choppy for swimming.

Either way though, the ones that are succeeding have discipline. They’re not “taking flyers” or “just giving it a shot.” They have well-defined entries and exits, knowing exactly what they’re willing to risk on the trade. Most importantly, they have discipline with their setup. Whether they get stopped out of their gains or stopped out on losses, they close the trade and move on. That’s what successful traders do best; they don’t swim against the tide and they know when to stay out of the water.

Read More

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Why It Pays to Develop Your Own Screeners

Do You Use the Most Popular Options Strategies? Here They Are

midterm elections and stocks

Good News, Bulls: The Midterm Elections Are Coming Soon

Whoa, what an ugly month it’s been! The S&P 500, Nasdaq and Dow Jones Industrial Average have fallen 8%, 6% and 11%, respectively. The Russell 2000 has been leading the decline, tanking 13% this October. It’s left investors flustered and defeated, but with the midterm elections just around the corner, maybe there’s reason for optimism.

Oddly enough, does anyone know why the stock market is declining? A knee-jerk answer might be to suggest its the trade war between the U.S. and China. But that’s been an ongoing saga, with little worry being reflected in the market until this month. Others might say earnings, but the decline began before quarterly results were released. Further, many of these results have been quite strong as well.

Weren’t interest rates a pretty big catalyst? They were, particularly as investors collectively regurgitated fears of the 10-year reaching a 3.5% yield. But that can’t explain all this weakness, as the 10-year topped out near 3.25% on October 5th. While that hammered the S&P 500 in the days and weeks after, consider that the index made a new low on October 29th while 10-year rates have trended lower for three weeks. 

The reason doesn’t matter; it is what it is. Those that have survived this month’s plunge don’t really need an explanation on what happened, they care much more about what’s going to happen. So what should we expect going into November?

Trading Around Midterm Elections

Historically speaking, the midterm elections are a great catalyst for stock prices. So if you’re a bull, perhaps you’re in luck. Dating back to 1946 and during the years that have midterm elections, the S&P 500 has a tendency to end the year higher than its October lows.

How accurate are we talking? Try 18 years out of 18 years during that span with an average return of more than 10%. That’s pretty convincing data. 

Some may argue that its performance is tied to the lows of October — who can time the bottom? But realize that the stock market didn’t bottom in early or mid-October. In fact, we don’t even know that the bottom is in. As we just noted, the S&P 500 made a new low on October 29th. With just one more day to go though, investors will have a reasonable risk/reward setup going into the last two months of the year and ahead of the Santa Claus rally — provided they’re into seasonal statistics.

The numbers go a step further, too.

So many people talk about what a stellar year the stock market tends to have during midterm elections. However, many do not realize a bulk of those gains come in the fourth quarter. The chart below is from LPL Research, and highlights the average performance of the S&P 500 during midterm election years since 1950. The action is pretty compelling for a seasonal investor.

how stocks perform during midterm elections

Data from LPL Research

(Note the dip in early November, when voting takes place).

Risk to the Midterm Elections Trade?

We outlined several of the major — and supposed — catalysts to the recent decline. Those include higher interest rates from the Federal Reserve and an escalating trade war with China. However, should those situations deteriorate from current conditions, it’s possible we’ll see that reflected in the stock market.

For instance, investors expect the Fed to again raise interest rates in December. While this action has long been telegraphed by the Fed, stock investors still don’t like higher rates. Nor does the president. So should the Fed hike once again near year’s end, that could keep a lid on stock prices. A further escalation of the trade situation won’t help matters, especially if it impacts large cap tech, transports, industrials, Apple (AAPL), Boeing (BA) and others.

Given the poor performance of the Chinese stock market and the heightening tensions with the U.S., it wouldn’t be surprising to see the trade situation get worse before it gets better. Taking it a step further, with the midterm elections in the first full week of November, one could imagine the Chinese government turning up the heat ahead of the vote.

Finally, the election outcome could be a risk too. Is the market baking in a Democratic “blue wave” to sweep Congress, essentially tying up President Trump and his future initiatives? Or will we have another term with Republicans controlling the House and the Senate? We’re obviously not picking sides in the matter here, but simply stating the obvious from an investment perspective. That being, the results of the midterm elections could have an impact on the stock market, particularly if investors believe the outcome will hinder the economy, the nation’s growth or both. 

The question becomes, how much of those outcomes are being priced into the market right now? 

free option strategy

Covered Call – Free Trade Idea

Every Friday we give you a free options trade idea identified by Option Party. Today, we’re focusing on the classic covered call.

OPPORTUNITY

There is an attractive covered call trade in DIREXION DAILY SMALL CAP BULL (TNA). It is currently trading at $57.18.

CHARACTERISTICS

There is a 72.3% chance the stock will close above 50.00 on 11-16-2018, and you will earn your target return of $190.50. There is a 77.4% chance the stock will close above 48.05 on 11-16-2018, and you will earn a profit. There is a 0.0% chance the stock will close at or below 0.00 on 11-16-2018, and you will have a total loss of $4,804.55.

ASSIGNMENT

For call options that are in the money when sold, the assigned return will be the same as the target return. For call options that are out of the money when sold, the assigned return will be more than the target return. There is a 72.3% chance the stock will close above 50.00 on 11-16-2018, and you will earn a return of $190.50.

ENTRY PLAN

To enter this position you will sell 1 call options expiring on 11-16-2018 with a 50.00 strike price and buy 100 shares of stock for 57.18. This will require a net debit of $47.94. The commission for this trade will be $10.55.

DISCLAIMER

All information presented here is current as of 10/26/2018 11:45 pm EST. All trading involves risk. Free trades ideas are presented for illustrative purposes only and are not to be construed as financial advice.

Finding Your Top Options Trade Has Never Been Easier

When used correctly, options provide robust potential thanks to their incredible leverage. But this creates a double-edged sword situation. While we can see that $1,000 options play turn into a $5,000 payout, we can also see it go to zero. When used recklessly, traders don’t have to worry about the old saying of “death by a thousands paper cuts.” That’s because options trades have the potential to deal just a few lethal blows to those who use them inappropriately.

But therein lies the potential for investors. Have a plan, limit your risk, backtest your strategy and respect the market. If traders do that, they’ll significantly increase their odds for success when trading options.

That’s exactly what Option Party is here to help with. We want to provide the tools necessary to making traders more successful with options. That goes from start to finish, too. Everything from choosing the proper risk/reward probabilities, to scanning new strategies, and now thanks to Portfolio Manager, users can test their automated options trading strategy right here on the platform as well.

The Perfect Way to Test Your Options Trading Strategies

While Option Party is here to help with all of those ambitions, some long-time users may be curious about the new layout while new users who recently joined Option Party may not know the old look too well. However, we want to make sure none of the platform’s features are slipping past users.

Screening Trades With Option Party

The login process remains the same, where users find themselves on the “Dashboard” page once logged in. However, next to the familiar “Screeners” tab is a new one, “Portfolios.” We’ll get to Portfolios in a minute, but first let’s touch on Screeners.

The Screeners page still looks the same, but instead of going to the screener setup page, users will find that clicking on a specific screener will land them right on the trade results page. The trade results page looks familiar at first, with trades sorted by Option Party’s trade ranking system.

However, the process of tweaking these screening methods has become much simpler under the new layout. Want to tweak the probability of profit or target return? Simply click on the “Entry” drop-down. Need to add an additional options strategy to the screener? Simply click on the “Strategies” dropdown.

option trading

From there, users still have plenty of screening options. Under the “Stock” dropdown, they can adjust the outcomes by P/E ratio, dividend yield, earnings growth, market cap, volume, the 52-week highs and lows, and a plethora of other options. The “Options” dropdown let’s us toy with delta, implied volatility, expiration and strike prices (how far in- or out-of-the-money the trade is).

The look is a lot cleaner and it’s a lot simpler to make minor adjustments and fine-tune the various strategies.

When users click on the the “Details” button for a particular trade, they also get a clean look at the specific security. As you can see below, selecting the “Stats” tab gets a number of details, like 52-week range, market cap and volume. The “Financials” tab gets P/E ratios, dividend yields and the like.

option party

Start a Portfolio With Option Party

Last week we introduced our new tracking feature, which allows users to select specific trades out of the trade screener and quite literally track their performance in a portfolio. To find it, head back to the top of the Option Party platform. Sandwiched between “Dashboard” and “Screeners” rests the “Portfolio” tab.

While this page is broken down in much more detail here, we will touch on it here. This is where users can see how their tracked trades are performing. What’s the benefit of this? Knowing how our strategy performs over time is paramount to knowing whether the strategy will succeed in real-world trading. 

What looks good on paper may not be good in the real world. That is to say, maybe we’ll find that our strategy is too risky. Perhaps we are using options with too long of expiration or can drastically improve our win percentage by tweaking the implied volatility screener. Or maybe it will validate our screening process and give us the confidence we need to apply it to our real-life trading strategy.

That said, Portfolio Manager does more than that. Users can set their own portfolio rules and construct their own strategies while adjusting entry and exit conditions. Go from ASAP entries to time-specific, delta-specific, volatility-specific (and more) entries. Users can alter their exit plan by gains, losses, time and much more. Set specific portfolio criteria and even select the pricing methods (midpoint vs. market pricing). Users can then tweak their portfolio to improve their results and see how ready it is for real-world implementation.

All of this is to say that, the new-look Option Party is here to simplify the user experience and bring even more power to users’ trading strategies.

free option strategy

Bull Put Spread – Free Trade Idea

Every Friday we give you a free options trade idea identified by Option Party. Today, we’re focusing on the bull put spread screener.

OPPORTUNITY

There is an attractive bull put spread trade in NETFLIX (NFLX). It is currently trading at $329.12.

CHARACTERISTICS

There is a 96.2% chance the stock will close above 260.00 on 11-16-2018, and you will earn your target return of $154.45. There is a 96.3% chance the stock will close above 259.23 on 11-16-2018, and you will earn a profit. There is a 0.8% chance the stock will close below 235.00 on 11-16-2018, and you will have a total loss of $4,845.55.

ENTRY PLAN

To enter this position you will buy 2 put options expiring on 11-16-2018 with a 235.00 strike price and sell 2 put options expiring on 11-16-2018 with a 260.00 strike price. This will produce a net credit of $0.81. The commission for this trade will be $7.55.

DISCLAIMER

All information presented here is current as of 10/22/2018 2:07 pm EST. All trading involves risk. Free trades ideas are presented for illustrative purposes only and are not to be construed as financial advice.

 

The Perfect Way to Test Your Options Trading Strategies

One reason options trading is great? Because of its flexibility. Investors can be bullish, bearish or neutral. They can play for volatility or lack thereof, and can use options to protect, enhance or repair their portfolio. But there isn’t a great way to test your options trading strategies before going live with them.

Sure, traders can use paper trading accounts, but that’s not always the best solution. It can be great for full-time investors who are sifting through charts 40 or more hours per week. But they don’t work well for traders who have other business or day jobs to attend to. Further, not all full-time traders have time to cater to paper trading one of their new emerging strategies.

But thanks to Option Party, they can now use an entirely new feature called Portfolio Manager. Users can apply various entry and exit rules, portfolio management criteria and choose which screeners they want to test.

So how does it work? First, let’s track.

Using the Tracking Strategy

Set your screening criteria just like normal. Once you scan the market and find your top trade results, you will now notice a new button that says “Track.” By selecting “Track” on the results page, users will then get a prompt that explains what’s going on where you can find the tracking for your new trade.

Image No. 1

Pretty neat, huh?

Here’s a Perfect Way to Test Your Options Trading Strategies

Image No. 2

By selecting the “Track” button, we’re taking that specific trade from our screening strategy and adding it to our portfolio. What’s this? We’ve been working on the portfolio concept for quite some time here at Option Party and we’re finally ready to introduce it to our users. This is step one. 

The prompt from above will take you to a page that looks like this:

Here’s a Perfect Way to Test Your Options Trading Strategies

Image No. 3

From here, you’ll notice a completely different layout. Going forward, anytime you want to “Track” a particular trade from the screening page, just simply hit the button and come find it on the new Portfolio page. 

There’s no limit to how many trades we can track, as they will simply continue to be added to the “Scan Results Portfolio.” To see how they’re performing, simply click on “Positions” while looking at the Portfolio Manager screen (shown above in Image No. 3 via the red arrow). That will bring you to a page like the one shown below.

using portfolio manager

Image No. 4

By clicking on the trade title — in this case, “LCol in NVDA expiring 11/16/2018” — it will bring up further details on the trade. It will show the entry price, number of options involved and the total trade value.

Other Portfolio Manager Options

Option Party users can do more than track the positions they’re interested in. In fact, they can create more complex and personalized situations using Portfolio Manager as well. Clicking on “Create Portfolio” will allow users to create their own portfolio with their own criteria. This is shown by the blue arrow in Image No. 2.

Specifically, they can set up how much money is in the portfolio, how much cash to set aside that’s not to be used for trading (that’s the “Cash Reserve” option) and even what type of pricing to use on the trades. That is, using market orders or using the midpoint of the big/ask.

Just like the screeners function, users can create as many or as few portfolios as they desire. From there, go back to the “Positions” page and select the “Create Position” options on the far right. This is highlighted by the dashed blue box on the right hand side in Image No. 4.

This will bring up a bevy of options, allowing the trader to be as broad or as specific as they’d like. Once we name the trade and select which screener we’d like to use, traders will have to determine how big they’d like the trade to be. If they’d like, they can also use a minimum trade amount too. Meaning that, if the trade size is $1,000 and we enter a minimum trade amount of 75%, then the trade will have be put on with a minimum size of $750, with an attempt to fill all the way to $1,000.

Entering and Exiting a Position

Creating a new position will also allow traders to choose from various entry and exit strategies. This ranges from entering at the earliest time possible, to selecting date, time and even earnings-specific options. When it comes to exiting the trade, users also have plenty of options. This ranges from a standard exit situation — either a percentage or dollar gain or loss — as well as more complex situations. Such as when the probability of profit falls below a certain mark, and/or allowing the position to be dependent on delta, implied volatility or simply how close it is to expiration. Best of all, these exit selections can be combined as well.

Lastly, realize that once a trade is entered and then exited, the entry rules for the next trade on the same strategy will trigger once again. Meaning that, say we tell Portfolio Manager to enter the best trade from our “Bull Call Spreads” screener. As soon as that entered trade triggers its exit, the portfolio will automatically begin looking for its next trade under this strategy.

This can be stopped though, if investors wish to pause it. Simple go to the “Edit Positions” button on the portfolio page, shown below in Image No. 5 with the red arrow.

 

Image No. 5

Toggle the entry rules to “Entry Disabled” and the strategy will not be deleted, but it will not be active again until the user toggles the entry back to an active position. These “idle” trade strategies can be found under “Empty Positions” on the “Positions” page.

free option strategy

Bear Call Spread – Free Trade Idea

Every Friday we give you a free options trade idea identified by Option Party. Today, we’re focusing on the Bear Call Spread .

OPPORTUNITY

There is an attractive bear call spread trade in TILRAY INC. CLASS 2 COMMON STOCK (TLRY). Currently it is trading for $144.85.

CHARACTERISTICS

There is a 92.5% chance the stock will close below 180.00 on 10-19-2018, and you will earn your target return of $58.75. There is a 92.8% chance the stock will close below 180.59 on 10-19-2018, and you will earn a profit. There is a 1.2% chance the stock will close above 200.00 on 10-19-2018, and you will have a total loss of $1,941.25.

ENTRY PLAN

To enter this position you will sell 1 call options expiring on 10-19-2018 with a 180.00 strike price and buy 1 call options expiring on 10-19-2018 with a 200.00 strike price. This will produce a net credit of $0.65. The commission for this trade will be $6.25.

DISCLAIMER

All information presented here is current as of October 12, 2018 12:01 pm (EST). All trading involves risk. Free trades ideas are presented for illustrative purposes only and are not to be construed as financial advice.

 

Enhance Your Gains on Stocks You Already Own With Options

Options are a leveraged trading instrument that can be used in many instances and as part of many strategies. Traders and investors can use options to replace stock positions, protect them, repair them and even enhance them. That’s right. With the stock enhancement strategy, we can take an ordinary stock position — perhaps on a name you already own — and boost the gains.

The best part is that we can do this without paying any money out of pocket. How does such a strategy exist and how does it work?

The strategy is simple. First, traders will have to be approved for the right level of options trading. Specifically, they’ll have to be able to enter debit spreads. That is, we’ll pay for the position rather than get paid for the spread, which would make it a credit spread.

To get started with options trading, see our recent post here.

In any regard, what is the stock enhancement strategy? Clearly a bull call spread cannot be put on for free. It’s also not a stock enhancement strategy, it’s simply a bullish strategy. However, say we own 100 shares of stock, buy a long call and sell two upside options.

The premium collected from the two short calls can pay for the premium of the one long call. In essence, the stock enhancement strategy is a combination of a covered call and bull call spread. The goal is to put the strategy on for as little net debit as possible, and possibly even a net credit. If shares fall or stay flat, the options position expires worthless, but we don’t lose any money on the trade. If it rallies, we have the chance to juice our gains on the position.

Breaking Down the Stock Enhancement Strategy

Let’s take a closer look at the stock enhancement strategy. Say we’re long 100 shares of ABC at $30. Shares are currently trading at $32, so we’re up $200 on the position. Like trading covered calls on stocks we already own, it’s a position we’re okay with holding for a while, but would also part ways with at the right price.

With that in mind, say we consider buying a slightly out-the-money call option at $33 and sell two $36 call options as a result. We pay $1.00 for the $33 call and collect $0.50 on each of the two $36 call options. Our net debit is $0.00, although we’ll have to account for commissions.

Let’s go through a few scenarios, the first of which is a stock that falls back to $30 on expiration. 

All of the option positions expire worthless. Our 100 shares of ABC fall $2 per share, leaving us with a $200 loss and brings our gains back to flat overall on the trade.

In the next scenario, say ABC rallies $2 a share and climbs to $34 per share by expiration. First and foremost, our two short $36 calls expire worthless, since the stock is below the exercise price. Our 100 shares of stock rack up an additional $2 per share in profit, bringing our total gains on the common stock to $400. However, our long $33 call ends up being worth $1.00.

Even though we paid $1.00 for that call, we collected $1.00 in premium from the short calls, making our effect cost zero. Thus, that $1.00 in premium is a profit to our trade, or $100. So rather than collecting “just” $200 in gains on the trade since we initiated the options trade, our profit actually increased by 50% to $300 thanks to our long call.

Finally, our last scenario involves a big rally in ABC, say to $37 per share.

With the stock over the strike price for both of our short calls, we will be exercised on our position. We sell the 100 shares of ABC at $36, netting a $6 per share gain overall ($600) and a $4 per share gain ($400) since initiating the options trade.

Our option position is worth $3.00 total and we do not have a net debit to subtract out. Again, this additional $300 gain becomes significant, increasing our gain on the trade by 75% and our overall gain by 50%.

How did we figure this out?

The gain on our trade after we initiated the options trade ended up being $400 on the stock position and $300 on the option position. Increasing the stock gain by $300 totals a 75% improvement to $700 altogether. On the overall trade, our $300 gain on the options position increased the $600 we made on the stock position, representing a 50% improvement and brings our total to $900 overall. 

Drawbacks and Other Considerations for the Stock Enhancement Strategy

So how does the stock enhancement strategy improve the total gains? Well, let’s look at the last scenario from above with a bit more scrutiny. Not only will it answer this question, but it will point out some obvious drawbacks too.

Owning just the stock from $30, we would have seen a rally to $37, good for $700. Notice though that we sold at $36 using the stock enhancement strategy. That’s one of the drawbacks, in that, just like the covered call, we are capping our gains. Thanks to having the long call though, we still came out ahead and ended with gains of $900.

In this scenario, we generated a return of 30% using the stock enhancement strategy, vs. a return of 23.3% under the stock-only strategy. Some will say, “is a 670 basis point increase worth it?”

Considering that the cost to put the trade on was zero, it seems so. But remember, that was on a stock that we were already long and already profiting on. Had we initiated the stock position at the same time or been underwater on the trade, our strategy would have generated an even larger return vs. the stock-only strategy. Had the stock closed closer to our short strike price on expiration, the stock enhancement strategy would outperform the stock-only strategy by even more. 

For instance, had ABC closed right at $36, our stock enhancement strategy would have still generated a total return of $900 vs. a gain of just $600 for the stock-only strategy. 

Clearly though, there are downsides to consider. As is always true with the market, we can’t have our cake and eat it too. Other drawbacks include not collecting a net credit. One of the main benefits to the covered call strategy is generating income. But by using that income to offset the cost of a long call, we all but eliminate that income.

That also leaves us exposed to more downside. Not that a covered call provides adequate protection, but it at least provides some insurance. Further, the stock enhancement strategy doesn’t work well in all trading environments — not that any strategy does. This one in particular works better in low volatility, trending markets rather than erratic and volatile ones.

One last tidbit? Investors can also use this strategy for bearish positions as well. Specifically, if they are short 100 shares of stock, they can sell two lower strike puts and buy one higher strike put to create the same strategy.