Stock investments, Technical analysis

Technical Indicators For Swing Traders (Using Marketxls)

Swing trading  is a market strategy  where positions are held for longer than one day. Most fundamentals traders tend to be swing traders because changes in the fundamentals of a corporation usually take several days or sometimes even weeks. This means that they have to hold their positions longer in order to profit significantly from price movements.

Essentially swing traders aim to profit from smaller price moves within a wider trend. They use the principle that price movements are rarely linear and it tends to oscillate. Swing traders use these oscillations to make profits for themselves.

Like day trading, swing traders also aim to make profits from both the positive and negative price actions.

The key difference between swing traders and day traders is that swing traders aren’t required to close their positions at the end of the day; they can hold trades for as long as they believe the momentum will last.

Swing trading indicators are technical analysis tools that are used by traders to identify opportunities for momentum in the markets. These technical indicators can further be divided into five categories: trend, mean reversion, relative strength, volume and momentum. Let us look at a few in more detail.

Moving Averages

Moving Averages(MA) are lagging trend indicators because they look back over past price action. Trend indicators analyse the movements of the market, whether it is going up or down, or sideways over time.

MAs calculate the mean of the market’s price movements over a period of time. A useful feature of using Moving Averages is that they smooth out any erratic short-term spikes. MAs are used for confirming past performance instead of predicting future movements. For example, the 50 day EMA(Exponential Moving Average) is used to measure the average intermediate price of a security. On the other hand, the 200-day EMA is used to measure the average long term price of a security. Swing traders use MAs to look out for crossover points. These occur when a short-term MA crosses the long-term MA. Technical traders believe that these points indicate that a change in momentum is going to occur.

EMA indicators

Bollinger Bands

Bollinger bands are mean reversion indicators. Mean reversion indicators are used to measure how far the price swing will go before counter triggers move the swing back to its original position.

Bollinger Bands are a technical analysis tool developed by John Bollinger to generate signals for stocks that are overbought or oversold. These bands identify the turning points of price movements and indicate how far the price swing will go before reversionary impulses bring it back.

bollinger bands indicators

Relative Strength Index

RSI is a momentum indicator. Momentum indicators evaluate the speed of the price change over time by highlighting potential oscillations within a broader trend. The Relative Strength Index (RSI) is one of the most popular indicators and it shows whether a market is overbought or oversold, thus indicating whether there might be a potential swing in the near future. RSI uses an oscillating chart with numbers between 0 and 100. It decides upon the number by measuring the market’s positive and negative closing prices over a predetermined period. Anything over 70 on the RSI indicates that the stock is overbought and it might be a good idea to short sell it. Anything below 30 indicates that the stock is oversold and it is a good idea to go long.

Stochastic Oscillator

Often compared with RSI, stochastic oscillators are another type of momentum indicator. Similar to RSI, stochastic oscillators also use the closing prices of a market over a period of time to indicate oversold or overbought characteristics. It also uses an oscillating scale ranging from 0 to 100. Anything over 80 is considered to be overbought while anything below 20 is considered to be oversold. However, this is where the similarities end. The Stochastic Oscillator uses two lines, one showing the current value of the oscillator and the other showing the three-day Moving Average. As price is thought to follow market momentum, the intersection of these two lines may indicate that a reversal is approaching. RSI is thought to be more useful in analysing trending markets, while Stochastic Oscillator is better for sideways markets.

Money Flow Index

Money Flow Index is also an oscillating momentum indicator like RSI. MFI makes use of market signals to indicate whether a stock is overbought or oversold., However, it differs from RSI and other oscillating indices because it uses both volume and price data instead of simply using price data. A MFI value above 80 indicates that the stock is overbought and a value below 20 indicates that the stock is oversold. When the MFI oscillator diverges from price, it signals that a potential reversal of the price trend is on the horizon.

Moving Average Convergence Divergence (MACD)

MACD is another important momentum indicator as it gives new swing traders a way to track rapid price changes in the market. MACD measures how fast a particular market is moving. Turning points are reached when the histograms reach their peaks. At these points, the buy and sell signals go off. A lot of important market information can be extracted from the height, depth, and speed of change of the histogram, making MACD an important tool for novice as well as seasoned traders.

MACD indicators

On-Balance-Volume (OBV)

OBV, as the name suggests, is a volume indicator. Volume indicators can be either leading or lagging and they are used to tally up the market trades and price movements to identify whether the market is bearish or bullish. Although OBV is plotted on a price chart, the quantitative values are not relevant in technical analysis. Analysts look at the nature of the OBV movements over time and use the slope of the OBV line to draw inferences. OBV is a leading indicator, so it can make predictions but nothing is said about the reasons behind these signals. Due to this, OBV can often make false predictions. To balance this out, OBV must be combined with lagging indicators like MAs to get better predictions.

Using MarketXLS

The technical analysis in excel functionality of MarketXLS provides almost every technical on your list. This includes overlap studies, volatility indicators, momentum indicators, volume indicators, pattern recognition and a growing list of more functions and data. You can combine the research from technical analysis with fundamental data provided by MarketXLS to perform powerful analysis.

First we need to obtain the historical data for our portfolio. Under the historical prices tab, customise your time period.

To perform technical analysis using MarketXLS, select the cells containing the OHLC pricing for your stock.

Click on any indicator from the menu and follow the prompts that show up. Unlike other functions, these prompts are already equipped with default values for parameters like time period, type of average, look-back period.

In case you want to compare your entire portfolio in one go, list your stocks in an Excel table and pull in the numeric values for RSI, MACD and other relevant technical indicators into the neighbouring columns. Then you can just sort your portfolio by comparing the indicator values to see if you want to hold onto or exit the stocks.

RSI-marketXLS.png”>RSI-marketXLS-300×141.png” alt=”” width=”595″ height=”280″ />

The Bottom Line

Technical indicators form an important part of a swing trader’s toolkit but one must remember that indicators alone don’t provide the complete picture of a market. Swing traders often combine predictions made by indicators with support and resistance patterns in order to improve their predictions for future trends and price movements.

Disclaimer

None of the content published on marketxls.com constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person.

The author is not offering any professional advice of any kind. The reader should consult a professional financial advisor to determine their suitability for any strategies discussed herein.

The article is written for helping users collect the required information from various sources deemed to be an authority in their content. The images, copyrights, and trademarks if any are the property of their owners, and no further representations are made.

References

https://www.ig.com/en/trading-strategies/what-are-the-best-swing-trading-indicators-200421#Ease-of-movement

https://www.investopedia.com/articles/active-trading/011815/top-technical-indicators-rookie-traders.asp

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Guru functions, Screeners, Valuation Models

O’Shaughnessy: Growth Market Leaders Screen (Using Excel Template)

James Patrick O’Shaughnessy is a portfolio manager and principal at O’Shaughnessy Asset Management. He is considered to be an expert in the field of investor behaviour and investing strategies. The O’Shaughnessy Market Leaders Value Strategy seeks to provide long-term growth through investments in capitalised domestic equities. Large and prominent companies, usually market leaders and meet the O’Shaughnessy quality criteria, have high valuations and high shareholder yields, which combines a company’s annual dividend and its annual rate of stock buybacks. Stocks are selected and weighted based on conviction and are broadly constrained by sector and industry.

Finding the Right Stocks

O’Shaughnessy argues that investors can predict where the markets are going by simply looking at long-term historical trends. O’Shaughnessy developed four stock selection approaches for individual investors that attempt to take maximum advantage of market trends through an examination of stock market history. He focuses on finding stocks among the various market capitalisations that are most likely to do well based on his research.

O'Shaughnessy template

Link to the Template: https://www.marketxlswp.com/template/oshaughnessy-growth-market-leaders-screen/

O’Shaughnessy’s Criteria:

• Market capitalisation should be greater than the market average

• The number of shares outstanding should be greater than the market average

• The cash flow per share should be greater than the market average

• The sales should be greater than 1.5 times the market average

• The price to sales ratio for the stock should be lower than the market average

• The EPS growth over the last 12 months should be greater than zero

• The stock should have a high 12-month price appreciation. For the last criteria, the 52-week relative strength is adjusted until only ten stocks pass the test.

Using MarketXLS

In the template, enter the stock ticker. In this example, we have considered Microsoft Corp. (MSFT). The price to sales ratio is 0.0472, which means that it matches O’Shaughnessy’s criteria. However, the stock doesn’t fulfill the other criteria. Thus, the stock MSFT doesn’t pass O’Shaughnessy’s Growth Market Leader’s Screen.

O'Shaughnessy template

Analysing the Screener

We now look at the performance of the O’Shaughnessy screen since its inception in 2001.

The fund has consistently performed well, churning out returns more than or at par with the Russell 1000 Value Index.

returns on O'Shaughnessy template

O’Shaughnessy’s Market Leaders Growth Screen emphasises diversification, but the sector allocations are not equal. We see that around 31.1% has been allocated to financial stocks and 16.1% to IT stocks. On the other hand, only 0.2% has been allocated to the energy sector. All this information is as of 31/12/2020 and is subject to change.

sector allocation on O'Shaughnessy template

The Bottom Line

While building a portfolio, O’Shaughnessy advises that the stocks should have the following characteristics.

  • • Pay dividends, buy back shares, and have other shareholder-friendly characteristics.
  • • Provide investors with solid and consistent returns
  • • It should be attractively priced
  • • Show momentum or have favourable uptrends

O’Shaughnessy believes: “Investing success is incredibly simple: spend less than you earn, make consistent investments in the global market and wait. If you do these three things, you cannot help but get rich as compounding works for you over time. But simple doesn’t mean easy. That last step (wait) is incredibly hard to do in practice. Controlling your behaviourw matters more than anything.”

Disclaimer

None of the content published on marketxls.com constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person.

The author is not offering any professional advice of any kind. The reader should consult a professional financial advisor to determine their suitability for any strategies discussed herein.

The article is written for helping users collect the required information from various sources deemed to be an authority in their content. The images, copyrights, and trademarks if any are the property of their owners, and no further representations are made.

References

https://www.osam.com/Strategies/Market-Leaders-Value

https://meetinvest.com/stockscreener/patrick-oshaughnessy 

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Fundamental analysis, Guru functions, Guru Strategies, Screeners, Valuation Models

Templeton Value Screen (Stock Screening Excel Template)

Value Investing is the investment philosophy adhered to by John Templeton, one of the best-known investment advisors today. While in college, Templeton studied under one of the forefathers of value investing, Benjamin Graham. 

When implementing a value investing strategy, there are several ways to create the screen. However, when screening for value in the form of attractively priced stocks, the foundation is often low price-earnings ratios. This Templeton screen is no different, incorporating a low price-earnings requirement as its base.

The John Templeton Value is an investing strategy that combines value and growth factors to find and identify stocks trading at low prices but having a positive long-term outlook. The components of this investing strategy include the stock’s price to book and price to earnings ratios. These two are the main value components. The growth components are solid margins and earnings and low debt. Sir John had said, “Bull markets are born on pessimism, grow on scepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” He lay down sixteen rules of value-investing. Let us look at a few of them.

templeton screen

Rule 1: Invest, don’t gamble.

Often traders treat the stock market as a casino, and in their lookout for easy money, they overestimate their chances of success. However, unlike a casino, the stock market has risks that are not as clearly defined, and investors face uncertain unknowns. Templeton also said that no matter how careful one is, nobody can predict the future. Hence his advice is simple: Buy value and quality; and diversify—by industry, risk, and country.

Rule 2: Invest in value and quality.

Templeton emphasised the quality of a stock before investing in it. A temporarily bullish market may pull up individual stocks, but it is important to note that individual stocks make up the market. If investors focus too much on market trends and the stocks; performance doesn’t coincide with the market predictions, then it can cause significant losses. So buy individual stocks, not the market trend or economic outlook.

Rule 3: Invest when the going is tough.

When the market performs well, most people are buying stocks, and when the prices are low, demand reduces, and investors become collectively pessimistic, so the entire market collapses. Thus it is not always safe to follow the market sentiment blindly. In simpler terms, it is impossible to outperform the market if one is only following the market. A good investor uses their discretion and intuition while trading.

Rule 4: Invest for maximum total real return.

Although it may be tempting to trade your investments according to the market’s movements frequently, brokerages and taxes can easily consume the profits. One should look at the total return of a trade, including the commissions, taxes, and inflation, before undertaking it. Templeton suggests that the entire portfolio should not only contain fixed-income securities but also contain some equity. 

In order to be eligible for the Templeton Screen, stocks have to meet specific criteria:

• PE Ratio < Average PE ratio for the last 5 years

• Average PE ratio for each of the previous 5 years < 75

• Growth rate in EPS over the last 12 months is positive

• Growth rate in EPS for the last 5 years is positive

• Estimated long-term growth rate in EPS is positive

• Estimated long-term growth rate in EPS > Industry’s median estimated long-term growth rate in EPS

• EPS for the last 12 months >= EPS for the last fiscal year (Y1)

• Year-to-year EPS have increased over each of the last 5 years (Y5 to Y4, Y4 to Y3, etc.)

• Operating margin for the last 12 months is positive

• Operating margin for the last fiscal year (Y1) is positive

• Operating margin for the last 12 months >= Industry’s median operating margin for the same period

• Operating margin for the last year (Y1) >= Industry’s median operating margin for the same period

• Operating margin for the last 12 months >  Average operating margin for the last 5 years

• Ratio of total liabilities to total assets for the last quarter (Q1) < Industry’s median ratio for the same period

 

Let us now see how we can make use of the MarketXLS Template to understand the Templeton Screen

In the template:

1. Enter the stock ticker in cell C4 in the Active Template tab

2. Enter values in Yellow highlighted cells for industry median values 

3. The final result if the stock qualifies for the Templeton screen can be seen in cell F3

Here we are considering the stock for Microsoft Corp. (MSFT). Out of the 14 listed criteria set by the Templeton Screen, MSFT manages to meet only 11 of them. The template also calculates the increase in EPS on a yearly basis for five years. The OPS is calculated and compared with the industry median and the five-year average. 

 

The Bottom Line

John Templeton’s Growth Fund delivered a 13.8% annualized return from 1954 to 2004, well ahead of the S&P 500’s 11.1% over the same period. The AAII implementation of this screen saw a 10-year return of 8.2% versus S&P 500’s -2.9% as of 26/02/2021.

 

Source: AAII

Sir John also emphasized qualitative factors, such as quality products, cost controls, and the intelligent use of earnings by management. One may follow Templeton’s advice to find stocks having lower than average price to earnings ratio and companies with increasing earnings growth rates. In other words, one may follow the Templeton way and “buy when there’s blood in the streets.”

It may also be helpful to remember his advice: “Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”

Disclaimer

None of the content published on marketxls.com constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person.

The author is not offering any professional advice of any kind. The reader should consult a professional financial advisor to determine their suitability for any strategies discussed herein.

The article is written for helping users collect the required information from various sources deemed to be an authority in their content. The images, copyrights, and trademarks if any are the property of their owners, and no further representations are made.

References

https://www.aaii.com/stocks/screens/68#performance 

https://morningstar.in/posts/49663/4-investing-rules-john-templeton.aspx 

 

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ETFs, Portfolio analysis and optimization, Portfolio Management, Stock investments

Charles Schwab-Portfolio Management And Exporting To Excel

Charles Schwab is an investment firm that offers banking, brokerage and financial advisory services through its operating subsidiaries. In October 2020, Charles Schwab acquired TD Ameritrade, another brokerage firm, to scale up their operations and expand their consumer base. Since Charles Schwab is a full-service investment firm that relies on technology, it suits a large variety of investors, ranging from active traders with good market knowledge to clients who are simply looking for investment and portfolio-related advice.

Pros and cons of trading using Charles Schwab

Pros

  • It has a highly robust ETF screener on StreetSmart Edge. The ETF screener has over 150 screening criteria, including fund performance, asset classification, Morningstar categorisation, and so on.
  • The StreetSmart Edge is highly customisable, and the screener is available to both prospective and actual clients.
  • The web platform and the mobile apps have the same functionality. Schwab’s merger with OptionsXpress in 2010 helped in modernising the platforms to improve user experience.

Cons

  • Schwab does not offer automatic cash sweeps, meaning that uninvested cash is not automatically transferred to a money market fund. To earn interest on the money, one has to take action and move the funds themselves.
  • The ETF screener available on the website is fundamental and outdated compared to the ETF screener in SmartScreen Edge.
  • Most of the derivatives tools used by equities traders are only available on the SmartScreen Edge.

Let us now see how we can use Schwab’s trading platform to check our positions, assess the markets, find and analyse trade ideas and enter orders.

  1. We’ll start by taking a look at a customised account layout focused primarily on tracking your portfolio. You can review your current balances and buying power in Account Details. In the Positions tab, you can see position information down to individual lot details, as well as realised gain/loss for your closed positions.Charles Schwab
  2. To see market news, click on the Streaming News tab, which provides a continually updated news feed from Briefing.com, Reuters, and others. Here we add the company we’re interested in, to our watchlist.Charles SchwabCharles Schwab
  3. To further our research on our preferred company, we start with the fundamental analysis. The fundamentals of a security are easily viewed by right-clicking on the security’s name from the watchlist. This brings up the Research tool, populated with the information for that particular stock. The earnings tab is an intuitive snapshot of the security’s most recent earnings report.Charles SchwabCharles Schwab
  4. Now we can review the technical data for our company. To determine where it is trading relative to its support and resistance, choose from various technical studies built into StreetSmart Edge, such as Simple Moving Average and Bollinger Bands, which we see here.Charles Schwab
  5. After completing our analysis, we are ready to make the trade. Start by loading the symbol into the All-In-One Trade Tool. This powerful order entry window allows you to define the full trade parameters from entry to exit — for stocks, ETFs, and single- or multi-leg option orders. Once the parameters are set, review the order and confirm the trade.Charles Schwab

Exporting Transactions

You can export your transactions data to .xls (for Office XP and later versions), .csv, or .txt formats from the Actions menu or by right-clicking within the Transactions display. MarketXLS has a special offer for Schwab customers. Use code broker2021 for a 15% discount.

MarketXLS has a range of utility-based templates that take this downloaded input and turn your Charles Schwab’s portfolio into a portfolio analytics dashboard in Excel.

A portfolio is essentially a range of cells containing the stock symbols and weights of the stocks. All the stocks’ total weight should add up to 100% for a portfolio to be complete.

Here we are using the portfolio analysis template from MarketXLS, which has all the commands you need to analyse your portfolio with inbuilt into the template.

excel

In this example, we have inserted our preferred stocks in cells B2 and B3 and their corresponding weights in C2 and C3. To calculate the portfolio’s monthly returns, we highlight the range of cells from B2 to C3 and use the function =MonthlyReturns(“Portfolio Range”). The default time period used is 12 months, but we can modify that by providing an optional integer value after the portfolio range.

excel

The template contains functions to calculate the wealth index of the portfolio, which is also calculated for 12 months. It also calculates the Sortino and Sharpe Ratios, Mean Returns, Value at Risk, Portfolio Beta, Treynor Ratio, and so on.

MarketXLS also uses SQP optimisation techniques to calculate the Efficient Frontier, representing the set of efficient portfolios that will give the highest return at each level of risk or the lowest risk for each level of return. This frontier is formed by plotting the expected return on the y-axis and the standard deviation as a measure of risk on the x-axis.

efficient frontier

All trademarks referenced are the property of their respective owners. Other trademarks and trade names may be used in this document to refer to either the entity claiming the marks and names or their products. MarketXLS disclaims any proprietary interest in trademarks and trade names other than its own or affiliation with the trademark owner.

Disclaimer

None of the content published on marketxls.com constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The author is not offering any professional advice of any kind. The reader should consult a professional financial advisor to determine their suitability for any strategies discussed herein. The article is written to help users collect the required information from various sources deemed to be an authority in their content. The trademarks, if any, are the property of their owners, and no representations are made.

References

https://www.schwab.com/

https://www.investopedia.com/charles-schwab-review-4587888

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black-litterman model
Guru functions, Portfolio analysis and optimization, Portfolio Management

Black-Litterman Model- Portfolio Allocation And Optimization

The Black-Litterman Model is a mathematical model used for portfolio allocation and optimisation. It is mainly used by portfolio managers of large investors, like insurance companies and mutual funds, to allocate their resources in various investments and assets. It was developed by Fischer Black and Robert Litterman of Goldman Sachs in 1990.

The BL model combines the Capital Asset Pricing Theory (CAPM) with Bayesian Statistics and the Modern Portfolio Theory to produce efficient estimates of portfolio weights.

Understanding the Modern Portfolio Theory

The modern portfolio theory is a theory on how risk-averse investors can construct portfolios to maximise the expected returns based on a given market risk level. It emphasises that the investor’s risk and returns are not independent observations, but they together influence the portfolio’s overall risk and return. The MPT talks about how investors can construct a diversified portfolio with multiple assets and maximise their returns for a given risk level.

However, the MPT is limited because it can only take into account the available historical market data, and then it uses the same to make assumptions about the future returns.

On the other hand, the Black-Litterman model lets the investor decide upon and apply their own views and risk preferences, and then it optimizes the asset allocation. The BL model improves the asset allocations provided by the MPT by incorporating projections on the future outlook and using pricing models that rely on subjective inputs in addition to objective inputs. However, there is a risk associated with incorporating subjective data as it may result in a biased model. For example, an overly optimistic view of one particular type of asset at a certain point in time may lead to portfolio managers assigning it a higher weight than what the MPT would recommend. If the asset then fails to keep up that momentum, it can result in significant losses, sometimes amounting to hundreds of billions of dollars. 

Structure of the Black-Litterman Model

black-litterman model

black-litterman model

Let us consider a five-asset portfolio model and calculate the expected returns using the Black Litterman model. The user inputs data regarding the (i)global risk premium and risk-free rate, (ii) asset class market capitalisations, (iii) asset class standard deviations, and (iv) asset class correlation. Here we see the results for some sample data using the BL model formulae:

excel

excel

Limitations of the model

  • Assumption of Normality

It is necessary to assume a normal distribution of the market returns. This assumption, in turn, makes the model constrained and reduces its flexibility to adapt to market parameters accurately.

  • Limitations of the market portfolio

The calculations involved in the model rely heavily on the equilibrium portfolio, so any changes in the market portfolio affect the final BL weights. Market equilibrium is tough to define in practice because many risky assets are not taken into account. Thus it is challenging to accurately reproduce the optimal BL allocations using an imperfect market portfolio in the real world.

  • Sensitivity to investor inputs

All portfolio models are affected by the investor’s input data, but the Black-Litterman model is especially sensitive because it contains the added parameter of investor beliefs. The investor has to be careful while trying to input their views into the model because that can easily sway the model’s predictions.

The Bottom Line

The Black-Litterman Model is a robust portfolio allocation algorithm that has broad uses in the finance industry. Despite its mathematical complexity, it simply combines Bayes Rule with the prior, current, and future data and expectations to formulate an optimal portfolio.

One of the Black-Litterman Model’s main advantages is that it allows investors and analysts to incorporate their own beliefs and opinions about the market into the calculations. This makes the BL model robust and reduces its sensitivity to the market dynamics and allows it to efficiently handle the variances of these views.

Disclaimer

None of the content published on marketxls.com constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The author is not offering any professional advice of any kind. The reader should consult a professional financial advisor to determine their suitability for any strategies discussed herein. The article is written for helping users collect the required information from various sources deemed to be an authority in their content. The trademarks if any are the property of their owners and no representations are made.

References

faculty.mccombs.utexas.edu › ChileMaterial › Bla…

 

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Option Strategies, Options, Options strategies

Long Diagonal Spread With Puts Option Strategy(Excel Template)

A long diagonal spread with puts is an options strategy created by buying a long term put having a higher strike price and selling a short term put having a lower strike price. This strategy is used to profit from neutral stock price action at the strike price. The maximum profit that can be realised occurs when the stock price of the underlying asset is equal to the strike price of the short put on a day of expiration. On the other hand, the full risk involved occurs when the stock price rises sharply above the long put option’s strike price.

Let us see how we can use the MarketXLS Template to understand long diagonal spread with puts better:

In the template provided

* Enter the stock ticker in cell E5

* Mention the strike prices-, short- and long-term expiry of the put options in D13, D15, D9, D11, respectively

* User can specify the risk-free rate 

* Update the Plot Gap based on your requirement of the payoff profile

In the example, we have considered the stock for Microsoft Corp. (MSFT). The stock price entered by the user is $240 for the short put option and $245 for the long put option. The template uses the Black-Scholes model for options pricing to calculate the expected price of the options at the time of expiry. 

diagonal spread

Profits and losses

The maximum profit that an investor can realise by playing this strategy occurs when the strike price of the short put at the time of expiration is equal to the underlying asset’s stock price. The profit equals the price of the long put minus the net cost of the diagonal spread. The question arises as to why this is the point of maximum profit. At this point, the long put’s price differs the most from the price of the expiring short put. Thus, the maximum profit from playing this strategy cannot be predicted because it depends on the long put price, which in itself is subject to the level of volatility in the market.

In a long diagonal with puts, losses can occur on either side of the strike price. The maximum risk associated with this strategy is the net cost of the spread(including commissions). If the stock price at the time of expiration rises sharply above the long put’s underlying strike price, then the diagonal spread’s net value tends to zero, and the entire amount paid for the spread is lost. However, the risk involved is less than that of a naked call option.

Breakeven points

The long diagonal strategy with puts option has one breakeven point, which lies above the strike price of the short put.  Since this is a dynamic trading strategy with many possible scenarios, it is impossible to calculate the exact breakeven point. The breakeven point of the short put at expiration is the stock price at which the price of the long put equals the net cost of the diagonal spread. 

diagonal spread with puts

Understanding the market forecast:

Changes in stock price

Short puts have a positive delta, and long puts have a negative delta. When the long diagonal position is established, the net delta is negative. With changes in stock price, the net delta can vary anywhere between -0.90 to slightly positive values. If the stock price is equal to the strike price of the short put at expiration, then the net delta approaches -0.90. If the stock price is below the strike price at the time of expiration, then the net delta is slightly positive. If the stock price rises sharply over the strike price, then the delta of the position approaches zero.

Change in volatility

Long options rise in price and make money as volatility increases, so they have a positive vega. In contrast, short options rise in price and lose money when volatility increases, so they have a negative vega. A long diagonal spread with puts has a net positive vega when the option is first established. The spread’s vega is the highest when the stock price at expiration equals the strike price of the long put, and the vega is the lowest when the stock price equals the strike price of the short put. If both the options go far into the money or far out of the money, then the net vega approaches zero.

Impact of time

Long options have a negative theta (lose money from time erosion), while short options have a positive theta (make money from time erosion). The net theta of a long diagonal spread is generally negative when the position is first established. The theta is the most negative when the stock price at expiration is close to the strike price of the long put, and the theta is the least negative when the stock price at expiration is close to the strike price of the short put.

The bottom line

One requires patience to trade using a long diagonal spread with puts. Since this strategy profits from time decay. Attention to detail and trading discipline are also essential because small stock price changes can significantly impact the profits and losses associated with a diagonal spread. The templates provided by MarketXLS are easy to use and can help you track your options with ease.

Disclaimer

None of the content published on marketxls.com constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The author is not offering any professional advice of any kind. The reader should consult a professional financial advisor to determine their suitability for any strategies discussed herein. The article is written to help users collect the required information from various sources deemed an authority in their content. The trademarks, if any, are the property of their owners, and no representations are made.

 References

https://www.fidelity.com/learning-center/investment-products/options/options-strategy-guide/long-diagonal-spread-puts 

 

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Option Strategies, Options, Options strategies

Long Butterfly Spread With Puts (Using Excel Template)

A long butterfly option with puts consists of two short puts at the middle strike and one long put, each at a lower and a higher strike price. The upper and lower strikes(wings) must be equidistant from the middle strike(body), and all the options must have the same expiration. 

This strategy is used when investors are looking for the underlying stock to achieve a specific target price at expiration. This strategy is established for a net debit, and the profit potential and maximum risk are limited. The long butterfly is an advanced strategy because the profit potential is small compared to the cost of the strategy. Since there are three strike prices and three bid-ask spreads, there are multiple commissions that the trader must pay. It thus becomes essential for the trader to open and close the long butterfly position at reasonable prices to ensure that the risk/reward ratio is favourable.

Let us see how we can use the MarketXLS template to understand long butterfly with puts:

In the template:

* Mention the stock ticker

* Enter the expiry date of the option. A list of upcoming expiry dates has been provided adjacent to the input.

* Enter the ATM strike price

* Enter the spread (the difference between higher and lower strike price)

* Enter the upper and lower expiry price in the cell D28:D29 in the template

long butterfly with puts

In this example, we consider Microsoft Corp (MSFT) having a share price of $244.07. The investor enters the ATM strike price of $240 with a spread of 5 and the expiry date on 19-02-2021. The template calculates the bid-ask spread for all three put options with strike prices of $235, $240, and $245. The net cash flow from this strategy is (-)$148.

Maximising profits

The maximum profit that can be achieved by playing this strategy is equal to the difference between the highest and the centre strike prices less the net cost of the position (including commissions). This profit is only realised if the stock price is equal to the strike price of the centre strike (short put) at expiration.

Risk potential

The maximum loss that can be realised is the net cost of the strategy (including commissions). The trader may face the maximum loss in two cases. Firstly, if the stock price is above the highest strike price at the time of expiration, all the puts expire worthlessly, and the loss becomes the cost of the strategy. Secondly, if the stock price is below the lowest strike price at the time of expiration, all the puts are “in-the-money,” and the net value of the butterfly spread is zero at expiration, and maximum loss is realised.

Breaking even

The long butterfly strategy has two breakeven points. The upper breakeven point occurs when the stock price is equal to the highest strike price at expiration, and the lower breakeven point occurs when the stock price is equal to the lowest strike price at expiration.

When to use this strategy

The long butterfly with puts can be thought of as a neutral or moderately bearish strategy. If the underlying asset’s stock price is near the centre strike price when the position is first established, then the underlying market forecast should be for “neutral” price action. If the stock price is above the centre strike price when the position is established, then the forecast must be for the stock price to fall to the level of the strike price and hence calls for bearish price action. This strategy has a low entry cost, which means a lower risk if the market acts unfavourably, but it can be challenging to lock down that pinning strike. The long butterfly spread with puts is good to use in low volatile markets, where the price has a high probability of pinning. However, it can also be a right choice in unpredictable markets due to its limited loss, but traders should keep a close eye on the trade and close it out once the stock moves to the short strikes.

long butterfly

Understanding the market forecast

Change in stock price:

Long butterfly options have a delta that is zero or very close to zero, regardless of the time to expiration or stock price. The long butterfly does not profit much from stock price changes. Instead, it profits from time decay when the stock price lies between the highest and lowest strike prices. 

Change in volatility:

Long butterfly spreads with puts have a negative vega, meaning that the price of the long butterfly falls with a rise in volatility. When volatility falls, the price of the option rises, and profits are made. Long butterfly spreads should be purchases when the market forecast is that volatility will decline.

Impact of time:

A long butterfly spread with puts has a positive theta when the stock price ranges between the lowest and highest strike prices. However, if the stock price moves out of this range, the theta becomes negative as expiration approaches.

The bottom line

The long put butterfly spread is created by buying one put with a lower strike price, selling two at-the-money puts, and buying a put with a higher strike price. Net debt is created when entering the position. Like the long call butterfly, this position has a maximum profit when the underlying stock price stays at the strike price of the middle options. While it is an advanced strategy, the limited risk potential is beneficial. The templates provided by MarketXLS are easy to use and can help you track your options with ease.

Disclaimer

None of the content published on marketxls.com constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The author is not offering any professional advice of any kind. The reader should consult a professional financial advisor to determine their suitability for any strategies discussed herein. The article is written for helping users collect the required information from various sources deemed to be an authority in their content. The trademarks if any are the property of their owners and no representations are made.

References

https://www.optionseducation.org/strategies/all-strategies/long-put-butterfly 

https://www.fidelity.com/learning-center/investment-products/options/options-strategy-guide/long-butterfly-spread-puts 

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Option Strategies, Options, Options strategies

Long Strangle Option Strategy (Using Excel Template)

A long strangle is a neutral strategy that involves simultaneously buying a slightly out of the money put option (having a lower strike price) and a slightly out-of-the-money call option (having higher strike price) of the same underlying asset and same expiration date. Long strangle strategies are debit spreads because a net debit is required to enter the trade. It is established for a net debit and profits if the underlying stock price rises above the upper breakeven point or falls below the lower breakeven point. 

The profit potential is unlimited, while the maximum loss is limited to the total cost of the strangle option.

Let us see how we can use the MarketXLS Template to understand the long strangle option strategy

In the template:

* Mention the stock ticker

* Enter the expiry date of the option. A list of upcoming expiry dates has been provided adjacent to the input.

* Enter the OTM strike price for the put and call option.

long strangle

Consider Microsoft Corp. (MSFT). In this example, we have chosen the expiry date to be 19/02/2021. The OTM strike price for put and call options are $240 and $250, respectively.

The template then calculates the bid-ask spread and the net cash flow. A high bid-ask spread of 10% in the put option signifies high volatility, while a low spread of 5% in the call option signifies greater liquidity of the security.

long strangle

Profits and Losses

Profit

A long strangle option strategy is profitable when the price of the underlying asset rises above the upper breakeven point or falls below the lower breakeven point. Considerable gains are possible, which may be calculated using the following formulae:

• Maximum Profit = Unlimited

• Profit Achieved When Price of Underlying > Strike Price of Long Call + Net Premium Paid OR Price of Underlying < Strike Price of Long Put – Net Premium Paid

• Profit = Price of Underlying – Strike Price of Long Call – Net Premium Paid OR Strike Price of Long Put – Price of Underlying – Net Premium Paid

Risk

The maximum risk for a long strangle strategy is realised when the underlying stock price at expiration is between the strike prices of the options bought. In this scenario, both the call and put options expire worthlessly, and the trader loses his entire initial debit undertaken to enter the trade. 

Breakeven

The long strangle strategy has two breakeven points which can be calculated using the following formulae:

• Upper Breakeven Point = Strike Price of Long Call + Net Premium Paid

• Lower Breakeven Point = Strike Price of Long Put – Net Premium Paid

long strangle diagram

Understanding the market forecast

Changes in stock price

When the stock price lies between the upper and lower stock prices, then the call option’s positive delta and the negative delta of the put option offset each other, so for small changes in prices between the strike prices, the strangle has a ‘near-zero delta.

If the stock price rises fast, the call increases in price more than the outfalls in price, and if the stock price falls fast, then the put rises in price more than the call falls. In this case, the strangle has a positive gamma. A positive gamma implies that the delta of a stock position changes in the same direction as the change in the underlying stock price. 

Change in volatility

As volatility rises, the options price and the strangle’s price rise if factors like stock price and expiration time remain constant. When volatility increases, the price of long strangles increase, and they become more profitable, so they have a positive vega. A positive vega means that a position profits if the volatility rises and makes losses if the volatility falls. 

Impact of time

Long strangles consist of two long options, so their sensitivity to time erosion or decay is higher than that of single option strategies. Thus, long strangles tend to incur more losses as time passes if the stock price doesn’t change.

The bottom line

The long strangle option strategy has some significant advantages. Firstly, the cost and maximum risk of one strangle is lower than that for one straddle. Secondly, for a fixed amount of capital, more strangles can be purchased. However, strangles are more sensitive to time decay than other strategies, and there is a greater chance of losing 100% of the strangle’s cost if it is held to expiration. The templates provided by MarketXLS are easy to use and can help you track your options with ease.

Disclaimer

None of the content published on marketxls.com constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The author is not offering any professional advice of any kind. The reader should consult a professional financial advisor to determine their suitability for any strategies discussed herein. The article is written for helping users collect the required information from various sources deemed to be an authority in their content. The trademarks if any are the property of their owners and no representations are made.

References

https://www.fidelity.com/learning-center/investment-products/options/options-strategy-guide/long-strangle

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Option Strategies, Options, Options strategies

Long Put Option Strategy-Tracking And Managing(With Excel Template)

The long put option strategy involves buying a put option, which is the choice to sell the option purchased at a predetermined price at the time of expiry. A trader typically invests in a long-put option when he or she anticipates a fall in the price of the underlying asset. Thus, the long put is used when the trader is bearish about the market. If the trader is correct in his prediction and the price goes down, he can exercise his option and profit. A long put can be exercised before its expiry if it’s an American option. If it is a European option, then it can only be exercised on the expiration date. 

A long-put option has a strike price, which is the price at which the put option’s buyer has the right to sell the underlying asset.

Let us see how we can understand a long put option using a MarketXLS Template:

In the active template:

* Mention stock ticker

* Enter the expiry date of the option. A list of upcoming expiry dates has been provided adjacent to the input.

* Enter the strike price you are looking to buy

* Enter the spread (the difference between the higher and lower strike price)

Let us take an example to understand better

Consider an investor who wants to invest in Apple Inc. The strike price for the put option is $135 having an expiry date of 19-02-2021.  Using the template, we can look at the payoff profile and decide whether it will be a profitable venture for us or not.

long put template

Profit and loss

A long put option strategy is the opposite of the long call option strategy because in the latter case, the trader has a bullish view of the market, while in the former case, the trader has a bearish outlook. It is easy to confuse the long-put strategy with the short-selling of stocks. However, compared to short selling, the long put option is less risky because the risk involved is not unlimited (as in the case of short selling), and it is limited to the amount of premium paid. 

The maximum loss is capped at the amount of premium paid for the option. Loss is realised when the price of the underlying asset is more than the strike price of the long put at the time of expiration.

On the other hand, the maximum profit is unlimited. It is calculated by deducting the amount of premium paid from the strike price of the put option. The maximum profit is realised when the price of the underlying asset reaches zero.

long put diagram

When to use this strategy?

The best time to use this strategy is when the trader is highly bearish towards the market and expects the underlying asset’s price to go down sharply. If he is correct in his prediction, and the price does go down, he makes profits. However, if the prices rise instead, the trader can choose not to exercise his put option, and he can exit the trade by paying the premium. This contrasts with the short selling of options because the trader is not required to make an initial investment, and his losses are capped. The long-put strategy is highly compatible with bearish or neutral markets and is highly incompatible with bullish markets.

The long put option can also be used to hedge against unfavourable moves in a long stock position. If the price of the underlying asset falls, then the put option increases in value, thus offsetting the loss due to a fall in the stock price. This kind of hedging strategy is called the protective put or the married put.

Key takeaways

The long put option strategy is easy to understand and useful. This strategy is suitable for beginners because losses are capped, and players can take advantage of a bearish market. The most important advantage of this strategy is that the trader has the right but not the obligation to exercise the option. However, as with other techniques, it is crucial to study the market thoroughly before making a prediction. In a long put strategy, timing is of the essence. The MarketXLS Template for long put options can be handy and help you track your chosen stock’s performance.

Disclaimer

None of the content published on marketxls.com constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The author is not offering any professional advice of any kind. The reader should consult a professional financial advisor to determine their suitability for any strategies discussed herein. The article is written for helping users collect the required information from various sources deemed to be an authority in their content. The trademarks if any are the property of their owners and no representations are made.

References

https://www.investopedia.com/terms/l/long_put.asp

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Option Strategies, Options, Options strategies

Short Put Option Strategy (With Excel Template)

A short put option strategy is executed when a trader sells or writes a put option. The trader who buys the put option is “long,” and the trader writing the option is “short” and receives the premium or the option cost of the trade. The short put option is also called the “naked” put or “uncovered” put.

This strategy is used when the investor is bullish towards the market and expects the prices to go up. If the prices do go up as predicted, then the investor can sell the put option and make a profit. However, if prices go down, the buyer of the put option exercises his option, and the investor incurs losses.

Let us see how we can use the MarketXLS Template for short put options tracking:

• Mention the stock ticker 

• Enter the expiry date of the option. A list of upcoming expiry dates has been provided  adjacent to the input.

• Enter the strike price you are looking to buy

• Enter the spread (the difference between higher and lower strike price)

Here is an example using Tesla Inc., which is currently trading for $816.12 per share. The investor decides upon the strike price of $815. The option premium is $20.5, which is the maximum profit that can be realised. 

short put option

Profit and Loss

A short put option is an excellent strategy to use when you are confident about the market’s direction. As an investor, you don’t need to buy or own the securities before putting a put option on them. As an investor, your intention must be to let the option expire without being exercised. During this period, the investor earns the option cost or the premium and makes a profit. It is important to note that the maximum profit is limited to the premium received.

However, if your market prediction is wrong, then you may incur large losses. If the asset price goes down and the buyer exercises the option, then the investor is obligated to buy the shares at the higher price (strike price) and sell at the lower current price.  

When to use this strategy?

The idea behind the short put strategy is to earn a profit from a rise in a stock’s price by earning the premium associated with the sale in a short put. The right time to use this strategy is when the investor is strongly bullish towards the market and expects the price of the underlying asset to rise sharply. The short put strategy gives limited rewards, but the risk involved is unlimited. The traders who use this strategy mostly take up many different positions to keep earning premiums from various sources. Occasional losses in one trade are easily compensated by premiums earned from others.

In case the writer of the option starts incurring losses from a trade, they can get away from the arrangement by buying the same option from someone else at a premium lower than the one he sold it.

short put graph

Advantages and disadvantages

The short put strategy provides a steady source of income in the form of premiums, unlike other strategies that only offer a one-time payment. 

On the other hand, this strategy has a high-risk potential that keeps increasing as the price of the underlying asset decreases. The accompanying profit potential, however, is capped at the premium received for the option. 

Key Takeaways

The short put option strategy is relatively high on the risk potential, and traders must use it cautiously and only when they are very confident about their market predictions. The MarketXLS Template for short put options can be handy and help you track the performance of your chosen stock. 

A short put option is still beneficial if the price of the underlying asset remains at the same level because the time decay factor will always be in your favor as the time value of put will reduce over some time as you reach near to expiry. This is a good options trading strategy because it gives you upfront credit, which will help offset the margin somewhat.

Disclaimer

None of the content published on marketxls.com constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person.

The author is not offering any professional advice of any kind. The reader should consult a professional financial advisor to determine their suitability for any strategies discussed herein.

the article is written to help users collect the required information from various sources deemed an authority in their content. The trademarks, if any, are the property of their owners, and no representations are made.

References

https://www.investopedia.com/terms/s/short-put.asp

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