Dan Passarelli, CEO - Market Taker Mentoring

Hey, Dan, Passarelli here. I want to give a helpful little tip today for anybody who trades debit spreads. Now, the conventional way to trade a debit spread is: a trader typically buys, usually in at the money, maybe a slightly out of the money call and then goes and sells a higher strike. Now for me and for the way that we teach at Market Taker Mentoring, typically the strike we sell is usually where resistance is. It's some point that, we think, over the next however many days the spread is for (in this case, we're looking at a nine day option, just arbitrarily). If I were to sell the 138 strike, that's where I think the stock won't get up to over the next Nine days, or at least won't go through. But which strike do we buy? Again, most people will buy at the money or slightly out of the money because that keeps the cost down. But if we want to be a little bit more aggressive and we want to be able to make more with A small move higher, then we might want to get a bigger Delta. In order to get a bigger Delta, all we have to do is instead of buying it at the money, we buy a further in the money Delta. If we were to buy this 134 Strike, we'd be buying a 53 Delta. And if we sell the 138 strike, we’d sell a 24 Delta. So that comes out to difference about what, 29? Right. But if instead we buy like maybe a 66 or 71 Delta, that makes our net spread Delta bigger, much bigger. In fact, about 18 points bigger in this example. Right now, the trade off there, of course, is that we end up paying more for the spread. So if we're wrong, we'd lose more. But all it takes is just it takes a much smaller move in order to get a profit out of there. We don't really have to wait for the trade to really take off and to reach that strike price. There are many other advantages of this, and we'll talk about those in a video that I have in store for you tomorrow. This is Dan Passarelli. Trade Smart.