Dynamic Hedging Options - Make money if the stock moves either direction

hey everyone welcome back hope you're having an amazing day hopefully the market is up i know my account's up the queues are down my my account is screaming upwards and it's because of trades like this now today i'm going to cover a trade that i didn't know anything about a couple of months ago there's very little information on it on the internet it's called dynamic hedging and i've started to do this in my account and i've actually created a spreadsheet specifically for tracking this particular type of trading because it's not for the faint of heart strap in let's go hey everyone welcome back my name is levi woods this is drawbridge finance this is not advice in any way shape or form this is my personal opinion this is what i'm doing in my account right now now today i'm going to show you a trade i'm going to set it up live in my brokerage and i'm also going to record it in my dynamic record keeper now if you're a patron you get to download the dynamic record keeper in july which is awesome if you aren't a patron you should probably just decide to sign up and join the discord chat it's amazing i'm trading every single day live chats thursdays for members only and the digital download every single month also you get a copy of my rolling options record keepers it's win-win-win your first month is virtually free because of all the awesome downloads that you get today i'm going to show you the trade entry of a dynamic hedge now this is a very interesting strategy i came across it a couple of months ago thanks to one of my patrons there's very very little information on it on the internet but it's kind of like the golden goose we're all looking for these trades where we have a very low capital outlay and it has massive potential to either side because i think right now this market could move up or down it functions kind of like a long straddle now for those of you who don't know how long straddles work long straddles are pretty simple you buy and at the money put and you buy an at the money call now the problem with them is we have theta decay working on both sides of this trade it's a low low capital outlay massive potential on either side but the stock actually has to move a relatively far distance in order for me to make money before expiration and if it doesn't i'm just out the money that i've spent so typically as a trader i actually trade short straddles more frequently i sell that amount of money puts and i sell at the money calls hoping that the stock's not going to move but there's times where i'm expecting the stock to potentially move in one direction or the other but what i think my assumption is that the stock is going to move around a bunch within the range and could explode to either side and i want to set myself up with a trade that could make money like that and also make money from the movement in between and this strategy is absolutely perfect for it i found a perfect setup so let me show you what it is so let's jump into interactive brokers and you can see what i'm looking at here i'm looking at ati the stock is currently trading at 23.85 earnings are coming up in two weeks but it's got this ivr of only 25 and the ivp of 90. now it's kind of in between but if i look at the stock chart on this this is what i'm interested in the fact that the stock has moved 3.2 percent today and if we look at the size of that candle 3.2 percent relative to some of the other candles this stock moves this is actually pretty small this stock typically is moving around you know three to six percent per day every trading day and so for a dynamic hedge this is optimal so that's step one is to look for a stock that's moving around a ton and doesn't have a huge massively high ivr because i'm going to be buying a long call and that's going to cost me money and i'm going to have to pay the extrinsic value for it the setup is pretty simple what i want to do is i want to buy a call that is greater than 100 days out so i'm going to look at the january 20th which 179 days to expiration we're looking at ati stock is trading at 23.84 what i want to do is i want to buy an at the money call that is going to give me potential upside unlimited profit potential to the upside so let me click on the 25 call that's immediately going to populate this down in the strategy builder and it's going to say buy one january 20th 25 call the delta is 53. now this is where the strategy becomes important would be super easy for me to do a long straddle which is just buying the put at the same price and it would cost me you know around 680 bucks 690 debit so if i look at the profit profile of this you can see what happens i've got the potential of making a ton of money in either direction if the stock was to go up to 40 dollars i would make money if the stock was going uh down to six dollars i would make some money the problem here with this trade is what if the stock stays in range what if it stays between 19 and 31 all the way to expiration now to be clear i probably wouldn't hold this trade to expiration because this curve starts to become more like this peak the later it gets so what i would want to do is to hold the trade for any time that i think the stock is going to move and then it would get out at a certain time now the strategy the delta delta neutral hedging works exactly the same way instead of buying a long put i'm actually going to sell shares now this is interesting because i'm going to have to sell short shares in my account let's take a look at seeking alpha for a moment if you guys aren't familiar with seeking alpha i use it a ton in my trading one of the things that i like about this right now is that it's a strong buy the the quant rating on here is showing that there's a potential that it could move up massively to the upside now if you're interested in seeking alpha you can use my affiliate link down below and it gives you a 50 discount which is awesome they give me a little kickback and i appreciate you using my links then you get an awesome discount which is pretty cool and i love seeking outfit it's fantastic service so in this case i think that the stock could go up or it could go back down pretty easily like look it could go back to 14 like it was trading last year so there's potential either way on this because there's a strong buy and there's this previous price action where we saw the stock trading at a much lower rate which is pretty great i'm just also going to look at trading view and i'm going to look at and see kind of how much movement we have and what i'm looking for is these long big candles and and ati has a perfect setup we've got earnings coming up and i'm going to be trading my long haul way out of this later date so i'm hoping that coming up with earnings or on earnings there's going to be a big move this would help this trade if it moved either direction there's another thing i need to look at and that's the lending rate because i'm going to be selling short shares so i'm going to go over to ati i'm going to right click i'm going to go down to analytical tools and i'm going to to look at the slb rate when i click on that it's going to come up and it's going to show that there are at least 3.5 million shares available to sell short and the fee rate is 0.25 percent so i'm going to be paying very very little interest on holding the short shares in my account this is important because i will always have short shares in my account another thing to take into account with this is that there's no dividend you know dividends can get tricky especially when we're we're dealing with the short positions and we would have to pay that dividend out of our pocket if we're holding short shares ati does not currently pay a dividend so these are kind of some of the checklists for this trade doesn't pay a dividend very low cost to borrow and lots of daily candle movement what we're going to do is if i buy one call i'm going to get a positive delta in my account of 0.52 but what i want to have is a neutral delta trade and this stays new to delta all the time so in order to do that what i would do is i would just sell some shares now i can click on the advanced button down below and i can add a stock leg to this in interactive brokers now i don't want to buy shares i actually want to sell them so i'm short so i'm going to sell these shares now to make this delta neutral there's 52 shares or 52 delta to the upside i'm going to sell 53 shares let me just hit enter and you can see that that makes the the trade delta neutral and it shows us the profit profile that is very very similar to the long straddle we've got this potential of making money now the the downside of this is if it doesn't move enough if it stays within this current range and as i said before that's typically how i would trade with a short straddle as i want it to stay in range in this case i want it to move out of the range but the beauty of this trade is that there's a whole bunch of micro transactions because i'm trying to keep it delta neutral if the stock moves up in price then the delta of the call is going to increase therefore i'm going to be swayed one way or the other i'm going to have further positive delta and what i'm going to do is i'm going to sell shares if the price of the stock rises now likewise if the price of the stock goes down then the delta is going to decrease and i will have too many short shares to be delta neutral so i will have to buy shares what this does is it creates many many transactions where i'm buying and selling stock and i'm buying when the price is low and i'm selling when the price is high and i'm doing this quite consistently so what i did was i actually built a little spreadsheet to be able to track this and it works pretty well i'll show you an example of one that's kind of filled out this was on airbnb it has a january 20th expiration date the strike price is 95. the stock when i opened it on july 5th i was trading at 95.33 this trade is working out quite well because the stock look what it's been doing it went down to 92 and i bought some that went up to 96 i sold it went down to 91 i bought went up to 94 i sold so on and so forth all the way up to 107 103 and currently trading uh at 104.84 so it's been moving around a bunch and i'm currently short 68 shares now at this point in time this actually hasn't been a winning trade i haven't actually closed but i have the potential all the time of making money off of it and it's costing me very very little per day because of these transactions buying and selling stock it's pretty awesome and i love it way more than a long straddle so let me show you exactly how to set up the sheet right from the start now there's an instruction sheet with detailed instructions on how to do each of the cells but i'm just going to go over to the blank dynamic hedge i'm going to make a copy of this so i'm going to say duplicate and once i've done that pretty simple today we're going to do the ati and i'm going to put in the option expiration date of january 20th 23 then i'm going to fill in the strike price and my strike price is going to be 25. now the the current price is actually going to be updated all the time enf so what i'm going to do right now is at first i'm just going to open the call and i'm going to do the first two transactions so let me go over to the brokerage and see if i can get filled now in this case what i actually want to do is more contracts so i'm gonna i'm gonna do three three contracts of the 25 that i'm going to buy and my delta on those is going to be 52.9 so 50 so i'm going to just multiply that 0.529 times 3 and i'm going to get a positive uh a delta from buying the long calls of 158.7 so that means i'm going to have to sell 159 shares that will make me delta neutral so you can see in here the delta neutrality is in here and i'm going to get a net credit to open this so let me just zip in here and uh and see if we can fill this little guy so we just have to confirm i'm buying three uh january 20th 25 calls and i'm selling a 159 of the ati and i've put a limit price in here and it's showing that i'm going to get a credit this is important i'm opening for a credit so i'm just going to say transmit i got a total credit of 28.59 for the fill which means i got 2 859 deposited to my account now i'm going to open up the risk navigator and i'm just going to show you the position and see that i currently have short 159 shares and i have long three of the january 20th 25 calls the delta of the long calls is 159 and i want to make sure that my short stock has a negative delta so that my overall position is a delta zero now this is where i can also look at how much this is costing me per day to hold it's costing me theta decay of three bucks so there's a couple of expenses of holding this type of position i'm paying interest i'm paying dividends and i'm paying a little bit of extrinsic value decay which is theta decay so now let's enter these trades into the record keeper i'm going to go over here i've got ati and you can see that it's already renamed the file anything that i enter in the stock symbol b2 is going to automatically update it's also pulling up the average share price which is showing it 23.70 right now so that updates automatically based on the entry in cell b2 now today is july 25th so i'm just going to simply enter july 25th and it's going to tell me it's going to give me a warning it says i have a partial entry check row 4. so it's got a little bit of a fail-safe in here it's asking me the option quantity that i traded now i bought three of these so i'm going to enter a positive number and say three and you can see it's a buy to open call now the transaction price that i paid uh i paid three dollars and six cents for each of them so i'm going to put that price in there three dollars and six cents and i paid a commission i'm going to add up all my commissions a dollar five for all three and there's a reason why i'm doing multiple contracts and this is and that's to keep my commission fees down now the the option is now open and what i need to do is i need to enter the current price and the current delta up in e2 and f2 that's the these are the cells that i'm going to enter and change each day to see if i need to buy or sell shares so what i'm going to do is i'm going to type in this current price i'm going to say it's 306 because that's what i just bought it for and i'm going to enter the current delta now the nega the delta is the overall position of the whole thing so if i look at my risk navigator really simple showing now it's showing as 160. it's already moved this is how quickly this trade works i'm going to enter it as 159 to show you that this is this is how it works it immediately tells me sell 159 shares now i've already done that so i'm going to type in today's date september 25th and i'm going to say sell sell stock now this has to be a negative i don't put this in as 159 because then it will highlight it red wants to be a negative entry so negative 159 because i'm selling the transaction price 23.754 so i'm going to type that in 23754 and i paid a commission to buy these shares and the total commission that i paid on these total commission of 80 cents entered as positive if you enter them as negative numbers they will show red even though it was a debit i'm not putting it as a negative putting in is both of these columns always get entered as positive numbers and then it will tell me that this was entered for a net credit which makes sense because i sold the shares now you can also see uh what has happened so i paid 919 debit to buy the long calls but i got paid 37.76 now my net liquidation value at this point and the current cash balance that i have in my account it's 2 857 that's how much money i got after commissions so now this is just gonna track all of my trades and now it's as simple as just entering in the components as they come up so now if the current delta change to 160 which it already has if i change if i change that it will say sell one share now for me personally i don't want to be buying and selling one share and it's the reason why i'm trading three lots of this i want to be buying and selling you know some at least five shares i don't want to do with these tiny tiny transactions because the commissions just eat up all of the profits so what i'm going to do is i will not adjust it right now even though it tells me to sell one share i'll wait until the stock has moved significantly in one way or the other and i will either buy or sell shares to go delta neutrality now i could do this daily i could do it multiple times per day or i could do it every couple of days it depends really on how much the stock is moving and how frequently i want to trade but the idea is to always keep it delta neutral and in this case the easiest thing to do if i didn't want to sell one is i would just type in and the date can be the same it doesn't matter if i'm uh selling another share but i would just go sell and i would type in negative one now i can't what i shouldn't do is put in positive one here it will show an error so i've got to put in negative one if i've chosen sell stock and then i put in the price that i i'm selling it at the stock is now up to 23.89 and i would be selling more shares so 23.89 and i would pay some um you know some commission for that so you can see how this strategy works already i'm already selling stock when they're high and if they went down i'm buying stock and i just constantly am making these transactions and making money over time now i don't want to do that so i'm just going to delete these out and i'm going to leave the transactions as they are now the really cool thing about this is is when you close the trade like if i if i want to close the trade off all i have to do is say well i'm going to sell this for credit say i'm closing it today and my current price of airbnb is 22.11 and i'm paying a commission on that of say a dollar five then it will tell me to buy 68 shares and then i would just come down here and i would want to zero out the position because i no longer have the the long calls in play so go down to septem july 25th and i would say buy stock and i would type in 68 shares and i would say the transaction price today trading at 104.52 so 104.52 and i pay a a commission now that whole sheet goes green in this case if i trade to close this trade i would have had a loss of 149 dollars now the awesome thing about this type of strategy is you can couple it with other strategies i've actually been selling iron condors against this dynamic hedge so i make money if the stock doesn't move and then i potentially make tons of money if it does move and it's kind of like one trade is paying for the other one so this has actually been quite a great win for me which has been pretty awesome you can see if you scroll down to the bottom there's the end of formulas this sheet could be extended but we have a three month window to kind of go yes it's to the moon or terrible either way i make money and if it moves around a bunch in the middle i'm making money too so it is fantastic i hope you guys enjoyed today's video remember to give me a thumbs up it helps the channel a ton and let's get rich together thanks so much for watching and see you very soon you