Dan Passarelli, CEO - Market Taker Mentoring

This week we're talking all about methodology, and specifically, I introduced to you, in our last video, the MTM Trading Plan Checklist. And we talked about the three analyses that form the beginning of any trade identification.

Now I want to talk about what is next and what is after that. Now we're going to move on from the first three steps to stating the forecast, selecting the strategy, and doing your Greeks and Risk analysis.

Let's say we settle on a trade here, right? Well, before we settle on a trade, let's say we develop our forecast, we do our three analyses and we decide, "Hey, for whatever reason, (this is just a hypothetical example): I think that NVDA is going to rise from its current level of about $170 up, let's see here, maybe $15 over the next twelve days to 185. Okay, so one way that I could trade that is, I could do a debit call spread. And if there was resistance, I would be more likely to pick a debit call spread than simply buying a long call.

If implied volatility is underpriced, I'd be better buying an at money call and selling that higher strike call because I'm okay being long volatility if it's underpriced. If it's overpriced, I might instead sell a put spread. So the moral of the story is all those three steps in my trade analysis help guide which strategy I select.

All right, so I'm going to very clearly state:

• the forecast encompassing the direction of the move,
• the magnitude of the move,
• the time horizon of the move,
• and what volatility might do if that happens.

Then once I have that holistic forecast, I select the best strategy that fits that. And the first strategy that I come up with may or may not be the best one. I always like to look at least three different ways to trade something. But let's just do this example that I was talking about buying the 170 calls, selling the 185 calls. I just bring that over to risk profile. This is called modeling a trade. I look and I say, hey, okay, so if this stock, let's put it on today's days and see, hey, as time passes, first of all, the blue line is at expiration, the purple line is today, and I can move that day ahead. And as you can see, every time I move the day ahead, that line changes just a little bit, slowly fades into the blue line.

I can change volatility. I can say, okay, if the stock gets down below this support level here, where will I take my loss? I want to start doing all this strategy to select the trade that in this situation has the best chance of winning, has the lowest risk and has the highest reward and it's never the same trade.

That's why I go through this process of doing the analysis, stating a holistic forecast, selecting the ideal strategy by using this risk analysis. Now, in addition to that, by the way, we can also pull up the price slices and if we do that, we'll just get rid of any offset here. If we do that, this gives us our Greeks for the trade.

Here, I'll get rid of this one. We'll just look at the at the money. So my Delta is 285, my Gamma is four. My Theta loses about $96 a day as we move towards the short strike. I know that my Theta would actually end up being positive and I can prove that by just saying, hey, what happens if the stock is at 183 and I just lock this, I changed this to 183 and see, my Theta is positive when we're close to the short strike.

I can do lots of little tricks and things like that to model this and really get a feel for how this position functions as time passes, as volatility changes and at different prices in the underlying and I can look at what my PNL is, how my Vegas affects the position and everything.

So this is a really essential part of the trade process. Maybe the most important part is picking the best way to trade that strategy. In tomorrow's video, we're going to talk about the next steps in the MTM Trading Plan Checklist.