Fdocuments - in - Swing Trading Success Debit Spreads Workshop Swing Trading Successdebit Spread PDF

presented by
Thomas Wood | MicroQuantSM
Identifying Key Support and

Resistance Levels
Swing Trading Success
– Debit Spreads –
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About Me… Formal info
•  1995 Graduate of

Vanderbilt University
•  Full Broker at 23 with

Merrill Lynch
•  12 Year Senior Advisor

Vanguard Asset
Management Service
•  27 months in Stocks &

Op-ons Live Trading Room
Swing Trading
•  Importance of Time Frame
•  Swing Trading defini-on
•  The Hourly Chart
•  How to Swing on the Hourly chart

Swing Trading
•  Fine Tuned Trading – ½ Size Charts
•  Technical Analysis Pajerns that work on a 60

min.
Debit Spread Basics
•  What is a Debit Spread?
•  Trading Stocks/ETFs vs Debit Spreads
•  Basics of Debit Spreads – Strengths &

Weaknesses
Debit Spread Basics
•  Debit Spreads – Key to trading Small Accounts
•  What you need to know to trade Debit

Spreads well…
Debit Spread Construction
•  The Basics – buy op-on, sell further away
•  Where to place Strikes?
•  How Wide?
•  How long un-l expira-on?
•  Profitable, now what? … Staged Profits

Debit Spread Trading Plan
•  Setup your Trade Parameters
•  Searching for Opporuni-es
•  Leong the Trade Develop & come to you

•  Do the trade on the ½ Size chart
•  Execute the trade on the :45s
•  Set your StopLoss

•  Evaluate every :30 and :00
•  Take Staged Profits
•  Take care of the last 20%

•  12 Pages of Wow!
•  Put it all together…

Swing Trading
Swing Trading
•  Swing Trading defini-on
–  Trades in a respec-ve Timeframe that lasts more

than one trading day
–  Usually “in a trade” across 2 – 4 trading days

Swing Trading
•  The Importance of Timeframe
-‐  Timeframe – the length of -me per chart bar

-‐  Bigger -meframes represent bigger Price Bars
-‐  Bigger Price Bars, bigger $$$ poten-al moves
-‐  Danger, Larger Stop Loss distances

Swing Trading
•  The Importance of Timeframe
-‐  Slower, more manageable Entry points (you have -me)
-‐  Tick charts : about 30 seconds a bar
-‐  Time Charts : 5min, 15minute, 60 minute bars
-‐  Easier to enter, flexibility to use ½ size Time charts
Swing Trading
•  Why Swing Trade?
-‐  Even on Swing Trades, stocks don’t move in straight line
-‐  Fibonacci levels work very well on 60 minute charts
-‐  Plan for a “measured” move & structure Debit Spread

accordingly
Swing Trading
Swing Trading
•  Why Swing Trade?
à TREND TRADES ß

-‐  Trend Trades / Breakouts are more plen-ful
-‐  Trending moves are more plen-ful on longer -meframes
-‐  See the trend on 60minute & Daily charts
-‐  Trends tend to persist within those frameworks.

Swing Trading
•  The Hourly Chart –
–  The best chart to use for swing trades that last 2 –
4 trading days is the 60 minute (Hourly) chart.
–  There are 6 – 7 Bars a day, each trade move is 12

– 24 bars
Swing Trading
Swing Trading
–  Very commonly used -meframe.

–  Hourly Support & Resistance levels
–  TA Price Pajerns usually are successful because

everyone sees them and trades them
Swing Trading
–  Op-mize Trading by adding
–  “Higher TF” Daily EMAs (8 day, 50 day)
–  Support & Resistance levels from Weekly &

Monthly charts

Swing Trading
Swing Trading
Swing Trading
•  Fine Tuned Trading – ½ Size Charts
–  When using 60 minute charts for TA pajerns,
–  Use a 15 & 5 minute chart to get a “headstart” on

the entry bar
–  Evaluate entrys at (x:45), using 60, 30, 15, 5

minute charts
Swing Trading
Swing Trading

min.
Reversals :
Divergences
Fibonacci Retracements
Swing Trading

min.
Trends :
•  Bullish Breakout, push higher through Resistance
level
•  Bearish Breakout, push lower through Support level

Swing Trading : Quiz
Swing Trading
1.  How many Hourly Bars are there in a

typical “Swing Trade?”
Swing Trading
Q1. How many Hourly Bars are there in a

typical “Swing Trade?”
•  Answer : typically 12 -24

–  Swing Trades last 2-4 days, with around 6
bars hourly per day, should be 12-24 bars for
the expected trade move from the entry bar.
Swing Trading
Q2. True or False.
“Trending Trades appear a lot less

frequently in the Hourly timeframe. “
Swing Trading
Q2. True or False.
“Trending Trades appear a lot less

frequently in the Hourly timeframe. “
•  Answer : FALSE
–  Swing Trades are more frequent in the Hourly
timeframe than the intraday timeframes of 1,
3, 5 minute timeframes. Almost even 50/50.
Swing Trading
Q3. Name one way to reduce the Entry

Trade risk when getting into a Swing Trade.
Swing Trading
Q3. Name one way to reduce the Entry

Trade risk when getting into a Swing Trade.
•  Answer : use a Smaller Timeframe

–  Swing Trades are usually done on an Hourly
chart. Use a 30, 15, or 5 minute chart to get a
“headstart” around “:45”, before the close of
the bar.
Debit Spread Basics
Debit Spread Basics

-‐  Basic level of Op-ons knowledge
-‐  Deriva-ve of stock
-‐  Delta : value changes with stock price
-‐  Theta : value decreases with -me to expira-on

Debit Spread Basics

-‐  Simultaneous long/short posi-ons of op-ons…
-‐  Same underlying stock
-‐  Same op-on type : call, put
-‐  Same expira-on date

Debit Spread Basics
•  Debit Spreads – the Basics
-‐  Debit Spread, pay for spread once placed
-‐  Loss is limited to amount invested.
-‐  No need for “margin”

Debit Spread Basics
-‐  Bullish : Call Debit Spread
-‐  Profits when price moves higher
-‐  Maximum profit @ expira-on

-‐  when price is higher than long call strike
Bullish Call Debit Spread
Debit Spread Basics
-‐  Bearish : Put Debit Spread
-‐  Profits when price moves lower
-‐  Maximum profit @ expira-on

-‐  when price is below than long put strike
Bearish Put Debit Spread
Debit Spread Basics
•  Trading Stocks/ETS vs Debit Spreads

–  Trading stocks/ETFs
•  Easier entry, simple brokerage order
•  Smaller Bid/Ask spread
•  Cheaper “stocks” commission rate
•  Rela-vely simple % return
Debit Spread Basics
•  Trading Stocks/ETF

•  $200 priced stock/ETF x 100 shares = $20,000 cost
•  $5 move to $205 x100 shares = $500 profit
•  % Return = $500/$20,000 = 2.5% return

Debit Spread Basics
•  Trading Stocks/ETS vs Debit Spreads
–  Trading Op-ons / Debit Spreads

•  More complicated order entry
–  Need to watch op-on volume
•  Bid/Ask spreads both help & hinder order fills
•  Because two op-on orders, 2x commission cost
•  BENEFIT : LEVERAGE !!!

Debit Spread Basics
•  Trading Debit Spreads

•  $200 priced stock
•  200/205 Call Debit Spread = $1.50x100 = $150 cost
•  $5 move to $205, Spread value $3.00x100 = $300 value
•  % Return = $150 cost /$150 profit = 100% return

Debit Spread Basics
•  Basics of Debit Spreads – Strengths &

Weaknesses
Debit Spread Basics
•  Debit Spreads – the STRENGTHS
-‐  LEVERAGE : Average trade profit is 50% or higher
-‐  Small cost to entry. Most $5 wide spreads cost $1 or $2
-‐  Easy to enter and exit in highly liquid stocks
-‐  S-ll have poten-al trades in less liquid stocks

Swing Trading Success
•  Debit Spreads – the Weaknesses
-‐  You are Long Op-ons, some Theta effect
-‐  Timing of entry & exit are important parts of trade
-‐  Moves need to happen rela-vely soon
-‐  Don’t hesitate to take profits when they appear

Debit Spread Basics
-‐  Debit Spreads are “CHEAP”

-‐ $100 -‐ $200 for $5 wide spreads with 14 days

-‐  Maximum risk is limited to Debit Paid
-‐  Control risk per trade to foster steady account growth
Debit Spread Basics
-‐  Can be applied to “Big” stocks with no addi-onal
cost – allows par-cipa-on in explosive moves
-‐  Also, wider universe of Stocks & ETFs can be
traded on Swing Trade -meframe with no
“penal-es”
Debit Spread Basics: Quiz
Debit Spread Basics
Q1. When Constructing a Debit Spread, the

following is true.
•  Debit Spreads is both long and short the

same “type” of option
•  They have different expiration dates
•  They have to be $5 wide spreads
Debit Spread Basics
Q1. -
•  With Debit Spreads, both long and short

options are the same “type” of option
Debit Spread Basics
Q1. Answer
•  Debit Spreads is both long and short the

same “type” of option
•  TRUE
•  Bullish : Long/Short Call Options
•  Bearish : Long/Short Put Options
Debit Spread Basics
Q1.

Debit Spread Basics
Q1. Answer
•  FALSE
•  The Spread must have the SAME option
expiration date
Debit Spread Basics
Q1.

Debit Spread Basics
Q1. Answer
•  FALSE
•  The Spread can be any distance between
the strike prices. (within reason – usually
$5,10, 15, 20 wide)
Debit Spread Basics
Q2. Why are Debit Spreads well suited for

trading Smaller Size Accounts?
Debit Spread Basics
Q2. Why are Debit Spreads well suited for

trading Smaller Size Accounts?
•  Answer :
–  Debit Spreads have a very low cost to enter
a position : $100-$200 a spread
–  Debit Spreads have a known “maximum” loss
–  Debit Spreads have a very nice potential
returns of 75%, 150%, +200% returns.
Debit Spread Basics
Q3. One major concern for Debit Spread

trades is Theta, or Option Decay.
Debit Spread Basics
Q3. One major concern for Debit Spread

trades is Theta, or Option Decay.
•  Answer : FALSE
–  With a well constructed Debit Spread, with
enough time left until expiration, Theta or Time
Decay is nullified by having long and short
positions, until a point where there is less than
7 days until expiration.
Debit Spread Construc-on
•  Process the Poten-al Move

•  Iden-fy the Profit Target Zone
•  Iden-fy the Stop Loss level

•  Process the Poten-al Move

–  With guidance from the Daily Chart
–  Iden-fy how far the trade could go on 60 min
•  Iden-fy the Profit Target Zone

–  Use TA Guides
•  Fibonacci Retracement Levels (38.2%, 50%, 61.8%)
•  Daily 8EMA, Daily 50EMA
•  Weekly/Monthly Support & Resistance levels
–  “Bracket” a reasonable $5 or $10 wide Target

Profit zone
Target Profit Zone
•  Iden-fy the Stop Loss level

–  Within the 60 min chart, iden-fy price level in
which to set Stop Loss
•  For Reversals: previous high/low levels
•  For Breakouts:
–  Fall back below resistance, or above support
–  Pullbacks into consolida-on zone
•  The Basics – buy op-on, sell further away

•  Strike Prices of Debit Spreads should bracket

the Profit Target Zone of the trade
Picking the Strike Prices
•  Strike Prices of Debit Spreads should bracket

the Profit Target Zone of the trade
•  Conserva-ve – ATM/ITM strike & OTM strike
•  Aggressive – OTM strikes near Profit Target $

Conservative vs Aggressive Spreads
•  How Wide?
•  Wide –
•  Mix of ATM/OTM –
•  Easier to profit, overall smaller % return

•  How Wide?
•  Narrow – finely tuned,
•  Aggressive OTM, biggest profit poten-al

Wide vs Narrow Spreads

•  Need just enough -me to complete the trade
but not much more
•  Normal Trade
•  Swing Trade : 2-‐4 days
•  Add 7-‐10 more
•  Target “days to expira-on” : 9-‐14 days
•  Conserva-ve Trade
•  Normal “days to expira-on” : 9-‐21 days
•  (Add +7 day buffer)

•  Conserva-ve “days to expira-on” : 14-‐21 days
•  Aggressive Trade
•  Swing Trade : 2-‐4 days
•  Add + 4 days
•  Aggressive “days to expira-on” : 6-‐8 days

•  Sample Calcula-on: Projected trade – 3 Days

•  Calculate Normal

•  Conserva-ve

•  Aggressive
•  Profitable, now what? … Staged Profits

•  Staged Profits
•  Along the path of the Profit Target Zone
iden-fy…
•  Support & resistance price levels

•  Daily moving averages
•  Fibonacci levels
Staged Profit Plan
•  Support & resistance price levels

–  Daily & Weekly price levels

•  Daily moving averages
–  8 Day & 50 Day Exponen-al Moving Averages

•  Fibonacci levels
–  On retracements : 38.2%, 50%, 61.8%
–  On extensions : 127%, 162%

•  Staged Profits
•  Iden-fy 2 or 3 “proven” levels, that have had

previous interac-ons of stock trend
•  Divide posi-on into 2 or 3 groups to ini-ate

sells
Staged Profit Plan
•  If enough shares/contracts…
•  Leave small por-on as “runner”, placing a

lock-‐in profit stop loss.

•  This “runner” might be start of a very large
move.
Interac-ve Exercise
Interactive Exercise
•  Type of Poten-al Trade?

•  Where is the Profit Target Zone?

•  Iden-fy Poten-al Strike Prices.
•  Iden-fy Stop Loss Level

•  What is your Entry Point?

•  Where are your Staged Profit Points?
•  What is your Profit Taking Plan?

•  Runner?
•  Walk-‐Through Trade one more -me…

Debit Spread Construc-on: Quiz
Q1. How do you decide what Strike Prices to

use for your Debit Spread?
Q1. How do you decide what Strike Prices to

use for your Debit Spread?
•  Answer :
–  The Profit Target Zone, the price level where
your believe your trade will move to, will
determine your strike prices.
–  Also, how aggressive or conservative you be
in your trade, affects your selection
Q2. Why do more Aggressive Trades have

shorter “days until expiration?”
Q2. Why do more Aggressive Trades have

shorter “days until expiration?”
•  Answer :
–  Normally, options with less “days until expiration”
are more affected by Delta price moves in the
underlying.
–  Also, max profit in an ITM spread occurs at
expiration, because the Theta effect is stronger
on short option than the ITM long option –
widening the value of the spread.
Q3. What is the process that I use in taking

profits that helps me boost my “win ratio”?
Q3. What is the process that I use in taking

profits that helps me boost my “win ratio”?
•  Answer :
–  I take profits, in a Planned Staged Profits
process. By using 2 or 3 logical points in the
projected move towards the Profit Target Zone, I
take profit “winners” by selling some percentage
of my overall positions at the “profit sell points”
–  I also move my stop losses to breakeven trades
when there is a profit, then eventually lock-in
some profits with trailing stops.
Detailed Debit Spread Trading Plan
•  Setup your Trade Parameters
-‐  Determine appropriate trade size

-‐  For me, define risk of loss at 50% spread
-‐  Divide total max loss by amount of 50% spread = #
contracts
•  Searching for Opporuni-es
•  Search on the :45s

–  Look at 60min, 15 min, 5 min charts

Swing Trade Entry Charts
•  Leong the Trade Develop & come to you
•  It might take 1 or 2 days for a poten-al trade

to develop enough to take a posi-on
•  Maintain an ongoing “watch list” of poten-al

opportuni-es 1-‐2 days out
•  Do the trade on the ½ Size chart
•  Once you see a poten-al trade to develop on

the 60 minute chart
•  Iden-fy the parameters to “pull the trigger”

on the trade
•  Execute the trade on the :45s based on price

ac-on on the 15 minute or 5 minute charts
•  Use limit orders to fine tune entry price
•  Don’t rush, watch for 2nd chance entrys

–  Breakouts : last kiss pullbacks
–  Reversals : sideways bounces, 3rd top/bojoms
Swing Trade Entry Charts
•  Set your StopLoss
•  Beware the big stoploss move
•  Enter on smaller TF opportunity

•  Watch for Opposite Trend develop in smaller

-meframe which may give clues to “wrong”
trade
•  If small TF says “wrong” but Large TF says

“right”, it is OK to reduce posi-on size
•  Evaluate Posi-on every :30 and :00
•  Remember this is a bigger TF opportunity
•  Don’t “stare” at the trade for the next 4 days
•  Don’t watch your P&L

•  Check it every 30 minutes.
•  Con-nue to watch the Indexes, usually you

are trading in the same direc-on
•  Again, Don’t watch your P&L – this leads to

rash decision making
•  Take Staged Profits

•  Set out your 2 or 3 “Planned” profit taking
levels
•  As you approach your levels, start to watch on

5 minute charts

•  Use limit orders to “sell into strength”
•  Take care of the difficult last 20%
•  Through experience, you’ll find out that the first

80% of a well thought out trade is an easy trade –
prices moves quickly, easy to take profits selling
into strength
•  The last 20%, especially when prices start to

encounter some resistance, it may be more
challenging to sell at your price. You may have to
be a lijle more aggressive with price to get out.
Debit Spreads Summary
Ques-ons & Answers
Debit Spread Trading Plan Checklist
•  Next Steps…
1st Time Around – Review Workshop recording
•  Setup 60min/Daily Scan charts
•  Look for trades on daily chart, and 60 minute

•  When poten-al Swing Trade setups start to form
•  Iden-fy 2 – 4 day move, Target Profit Zone
•  Structure your Debit Spread Strike Price levels

and Time Un-l Expira-on.
•  Iden-fy Entry point, Use 5min & 15 min charts to
enter the posi-on
•  Once your “in the trade”
•  Set stop loss
•  Setup your 2 – 3 Profit Taking Levels
•  Watch Trade every 30 minutes, Watch indexes

•  Carry out Profit Taking Exit Trades, as each

level is hit.
•  Adjust to Break-‐even & Profit Locking Stop

loss Order at each planned Exit
•  Leave “runner” on with logical Stop Loss

Example Stock List for Debit Spreads
Example Stock List for Debit Spreads
Thank You

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presented by

Thomas Wood | MicroQuantSM

Identifying Key Support and

• 1995 Graduate of

• Full Broker at 23 with

• 12 Year Senior Advisor

• 27 months in Stocks &

• Importance of Time Frame

• Swing Trading deﬁni-on

• The Hourly Chart

• How to Swing on the Hourly chart

• Fine Tuned Trading – ½ Size Charts

• Technical Analysis Pajerns that work on a 60

• What is a Debit Spread?

• Trading Stocks/ETFs vs Debit Spreads

• Basics of Debit Spreads – Strengths &

• Debit Spreads – Key to trading Small Accounts

• What you need to know to trade Debit

• The Basics – buy op-on, sell further away

• Where to place Strikes?

• How long un-l expira-on?

• Proﬁtable, now what? … Staged Proﬁts

• Setup your Trade Parameters

• Searching for Opporuni-es

• Leong the Trade Develop & come to you

• Do the trade on the ½ Size chart

• Execute the trade on the :45s

• Set your StopLoss

• Evaluate every :30 and :00

• Take Staged Proﬁts

• Take care of the last 20%

• 12 Pages of Wow!

• Put it all together…

• Swing Trading deﬁni-on

– Trades in a respec-ve Timeframe that lasts more

– Usually “in a trade” across 2 – 4 trading days

-­‐ Timeframe – the length of -me per chart bar

-­‐ Bigger Price Bars, bigger $$$ poten-al moves

-­‐ Danger, Larger Stop Loss distances

-­‐ Slower, more manageable Entry points (you have -me)

-­‐ Tick charts : about 30 seconds a bar

-­‐ Time Charts : 5min, 15minute, 60 minute bars

-­‐ Plan for a “measured” move & structure Debit Spread

à TREND TRADES ß

-­‐ Trending moves are more plen-ful on longer -meframes

-­‐ See the trend on 60minute & Daily charts

-­‐ Trends tend to persist within those frameworks.

• The Hourly Chart –

– There are 6 – 7 Bars a day, each trade move is 12

• The Hourly Chart –

– Very commonly used -meframe.

– TA Price Pajerns usually are successful because

• The Hourly Chart –

– Op-mize Trading by adding

– “Higher TF” Daily EMAs (8 day, 50 day)

– Support & Resistance levels from Weekly &

• Fine Tuned Trading – ½ Size Charts

– When using 60 minute charts for TA pajerns,

– Use a 15 & 5 minute chart to get a “headstart” on

– Evaluate entrys at (x:45), using 60, 30, 15, 5

• Technical Analysis Pajerns that work on a 60

• Technical Analysis Pajerns that work on a 60

• Bearish Breakout, push lower through Support level

•  1995 Graduate of

•  Full Broker at 23 with

•  12 Year Senior Advisor

•  27 months in Stocks &

•  Importance of Time Frame

•  Swing Trading deﬁni-on

•  The Hourly Chart

•  How to Swing on the Hourly chart

•  Fine Tuned Trading – ½ Size Charts

•  Technical Analysis Pajerns that work on a 60

•  What is a Debit Spread?

•  Trading Stocks/ETFs vs Debit Spreads

•  Basics of Debit Spreads – Strengths &

•  Debit Spreads – Key to trading Small Accounts

•  What you need to know to trade Debit

•  The Basics – buy op-on, sell further away

•  Where to place Strikes?

•  How long un-l expira-on?

•  Proﬁtable, now what? … Staged Proﬁts

•  Setup your Trade Parameters

•  Searching for Opporuni-es

•  Leong the Trade Develop & come to you

•  Do the trade on the ½ Size chart

•  Execute the trade on the :45s

•  Set your StopLoss

•  Evaluate every :30 and :00

•  Take Staged Proﬁts

•  Take care of the last 20%

•  12 Pages of Wow!

•  Put it all together…

•  Swing Trading deﬁni-on

–  Trades in a respec-ve Timeframe that lasts more

–  Usually “in a trade” across 2 – 4 trading days

-‐  Timeframe – the length of -me per chart bar

-‐  Bigger Price Bars, bigger $$$ poten-al moves

-‐  Danger, Larger Stop Loss distances

-‐  Slower, more manageable Entry points (you have -me)

-‐  Tick charts : about 30 seconds a bar

-‐  Time Charts : 5min, 15minute, 60 minute bars

-‐  Plan for a “measured” move & structure Debit Spread

-‐  Trending moves are more plen-ful on longer -meframes

-‐  See the trend on 60minute & Daily charts

-‐  Trends tend to persist within those frameworks.

•  The Hourly Chart –

–  There are 6 – 7 Bars a day, each trade move is 12

•  The Hourly Chart –

–  Very commonly used -meframe.

–  TA Price Pajerns usually are successful because

•  The Hourly Chart –

–  Op-mize Trading by adding

–  “Higher TF” Daily EMAs (8 day, 50 day)

–  Support & Resistance levels from Weekly &

•  Fine Tuned Trading – ½ Size Charts

–  When using 60 minute charts for TA pajerns,

–  Use a 15 & 5 minute chart to get a “headstart” on

–  Evaluate entrys at (x:45), using 60, 30, 15, 5

•  Technical Analysis Pajerns that work on a 60

•  Technical Analysis Pajerns that work on a 60

•  Bearish Breakout, push lower through Support level

1.  How many Hourly Bars are there in a

•  Answer : typically 12 -24

•  Answer : use a Smaller Timeframe

•  What is a Debit Spread?

•  What is a Debit Spread?

•  Debit Spreads – the Basics

-‐  Debit Spread, pay for spread once placed

-‐  Loss is limited to amount invested.

-‐  No need for “margin”

-‐  Bullish : Call Debit Spread

-‐  Proﬁts when price moves higher

-‐  Maximum proﬁt @ expira-on

-‐  Bearish : Put Debit Spread

-‐  Proﬁts when price moves lower

-‐  Maximum proﬁt @ expira-on

•  Trading Stocks/ETS vs Debit Spreads

•  $5 move to $205 x100 shares = $500 proﬁt

•  % Return = $500/$20,000 = 2.5% return

•  Trading Stocks/ETS vs Debit Spreads

–  Trading Op-ons / Debit Spreads

•  Bid/Ask spreads both help & hinder order ﬁlls