lystn

Hey everyone, Kirk here again from optionalpha.com and welcome back to the daily call. On today's call, we're going to talk about how you setup trade adjustment alerts using Deltas. Really, this is a question that came from the community. Somebody asked me and they said, "Kirk, how do I setup these trade adjustment alerts inside of Thinkorswim or any broker platform that has this capability to use Deltas to basically let me know when I should adjust my trade?” Now, we've talked about this in previous shows on our main podcast, so you can just search the main podcast or the website about setting up adjustment triggers. But typically, what happens is that say you are trading a short strangle where you're selling a naked call, selling a naked put and initially, both strike prices are at the 15 Delta. Again, you sell the 15 Delta puts, sell the 15 Delta calls. Now, what you could do if you don't have the ability to monitor that trade all the time is setup what are called “trade adjustment alerts” and those are based off of the Delta that you got into for that initial strike price. The thought process behind this is that when the Delta say doubles for your particular case… Again, we went through different scenarios in the original podcast on our main show. But let’s say that you want to be alerted when the Delta for either strike price that you traded doubles in value, so it goes from 15 to 30. Now, why would you want to do this? You would want to do this because then, it might alert you that the market is moving against one side or another of your position and basically, your risk of losing on that position has doubled. Originally, you had maybe a 15% probability that the strike price is out of the money and expires worthless, now the market might be moving higher or lower, now there’s about a 30% chance that the strike goes in the money and starts losing. Your risk is basically doubled in that case. It’s not to say that you automatically make an adjustment at that point. It’s just to alert you and bring you back to the position, so that you can take a look at it, analyze it and see if it’s worth making an adjustment or not. The easy way to set this up is inside of Thinkorswim, all you have to do is go to your individual trade once the trade is actually executed and on… You really can’t do this until the trade is actually on and executed. You want to click on the strike price of your short strikes. Again, if you did a strangle, you’d click on the strike price of your short calls or your short puts. When you right-click on that strike price, you can bring up an order dialogue that says “create alert.” It’s a little menu that says “create alert.” Inside create alert, you can create alert based off of a couple of different variables. Now, they have things like the bid price or the ask price of the option contract, we have the mark price, you have implied volatility. You can do a lot of different things, but what we want is we want the Delta. When the Delta of that option contract gets to whatever parameter we set, it will let us know. What’s cool about Thinkorswim right now is that they have the ability to notify you via text, email, notification on the app, like whatever works for you. You can do all three or not. I usually just set it up as a simple email alert and then I get an email from them that says, “Hey. Your Delta on X, Y, Z trade has increased to 30.” You can set this up in both directions. You can say, “Look. Let me know if the Delta on my calls becomes .3 or higher, so 30 Delta or higher.” On the put side, you set it up and you say, “Let me know if my Delta is at or below a -.3.” Because again, Deltas on put options are always negative, so we always want to set it at or below -.4. Did it decrease effectively or double in risk, but it decreased from -.15 to -.3? I know this is a little bit technical. I know it’s a little bit weird setting this up. We do have some video tutorials on this, so you just search our website and price triggers and email adjustment triggers. You should be able to find some of these. But again, it is pretty easy to set these up inside of most broker platforms, especially if you’re using Thinkorswim or some of these other big brokers. You have the ability to setup these alerts and use them. Now, I don't use them all the time. It’s usually if I’m travelling or if I know I won’t be available during that time period. But most of the time, since we’re monitoring trades during the day and I check my positions at least once a day, then I have the ability to monitor them. I don’t have to setup these alerts, but they are a very useful tool if you don't have the ability to access the markets every single day. As always, hopefully you guys enjoy these and until next time, happy trading!