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Track 'n Trade Futures End of Day Options
Buying a Put
Video Transcript
In this Track 'n Trade Pro Options trading training video, I want to talk to you about buying a Put option.
First, when you buy a Put option, that means that you anticipate the market to go down. What we're looking at here is we're just looking at this February Live Cattle contract. We're noticing that this market is coming into a nice little head and shoulder formation.
This is a topping recurring price pattern, indicating that our market should making a reversal here soon. We're going to anticipate a reversal of this market.
This is the neckline and of course a break below the neckline is this sell signal. Rather than jumping in with a futures contract we want to consider this market for an options order. Since this market has had good upside potential, and on several occasions, given us the reason to believe that it might be turning around coming back down, or for whatever we feel like we want to use an option rather than an outright futures.
We rotate through our indicators and we notice that we have already received a sell signal on our AD indicator. We've received a sell signal on our MAC-D indicator. We've received a sell signal on our momentum indicator. We're receiving a buy signal on our stochastics indicator.
Now, this is consistent with what we want we want to see, because we're looking for a right shoulder. A right shoulder means that this market should be coming back up and giving us a point here, before it turns around and drops back down.
At any point in this time, we might want to go ahead and consider buying our option. We can let this market go one more day. Oh, it dropped below the neckline at this point. What's the next day going to do? It popped back up, maybe one more day. Maybe at this point, we want to go ahead and place our order for our Put option.
What we do is we simply click on the Put option button, we drag it along the screen, you'll notice that it jumps between the different strike prices, and we bring it in. Let's go, just maybe three strikes out of the money.. 1, 2, 3. Now, that would be an 87.00 Put, it would cost us $440.00. If we went one more out it would be an 86 Put, for $320.00. Let's do the 440 Put $440.00 Put at 87.00. Go ahead and release our mouse button. Of course it comes up and gives us this dialogue box, which tells us that we want to buy (1) 87.00 Put at $440.00 Premium 1.1. We go ahead and we hit Okay. It says there's insufficient funds in your account. This means that we have not made an initial deposit to open up our account in Track 'n Trade Pro. Let's go ahead and tell it Yes we want to open our account. I'm going to put $5,000.00 in there to open our account. We hit Okay. That satisfies our need for money to buy our option on the following day.
We go ahead, I'm going to switch this over to our accounting window, step the market forward, one day. That option is now filled at $440.00. We bought (1) 87.00 Put value $440.00. We paid $440.00 for it, the value is at $440.00. It cost us $20.00 to place the order with our broker, so our total is -$20.00.
We go ahead and step the market forward one day. The very next day that we placed that order, the value of that option becomes $4,740.00. Of course, I'm using this example is because it shows the value of an option increasing quite significantly. But that's because this is the time that the Mad Cow was reported in the United States. This is of course, Live Cattle, this is the price of Live Cattle at the time. This option increased in value over night, that much money. Due to the fact that Mad Cow was introduced or found in the United States.
Let's go ahead and step forward one more day, watch this option to see what happened during this period of time. Now, the market dropped significantly, had another limit day down. The value, the option re-evaluated and comes in at a value of $4,000.00 the following day. Of course our cost on this, had we done this on the day, and been able to be filled on that day was $440.00 and now our profit is $3,540.00.
Step that market forward, again, the market drops, they re-evaluate the price or the value of that option; It's now worth $4,400.00 and as this market drops, now the value of that option is worth $6,000.00. We can notice over here in our accounting system, that we're up $5,540.00. As this market moves some more, it's starting to come against us. Now, we're $5,200.00.
Let's say that we want to go and liquidate our option at this point. What we do is we simply right click on it, I'm going to turn off the text. We grab our Put button, drag it down to the exact same strike price release the mouse button and this time instead of buying a Put, we're going to sell 1 Put. We go ahead and we hit Okay. It sells our Put option, we step the market forward, sells it on the open of the following day. We sold our Put option, and we ended up with a profit of $4,740.00.
That's how you buy a Put option with Track 'n Trade Pro.