Lesson 3

Creating and editing a risk graph

Creating a Trade

There are two ways to create a trade:

• Find a trade
• Build a trade

Finding a trade means that you want to see a list of possible trades, you want choices, to compare one trade to another, and to find the best one for the expectations that you have. Building a trade means that you already know exactly what trade type you want to do, so you only wish to create a new trade and add option contracts to the trade.

You can initially use the "find a trade" method by selecting one of the trades which you found during a search, or you may use the "build a trade" method by going directly to the Chain page. If you know exactly the deltas and expiration date of your trade, it is usually faster to create using the “Build A Trade” feature on the Chain page. You can also find trades as we saw in lesson 2 if you are not sure which trade you want to do.

Your goal in creating a trade is to make it so that you will make money as time passes without taking too much risk, and to be able sleep at night. It is highly recommended that you read the article on back testing so that you can create your own personal trading system that fits your own personal risk tolerance model.

Some traders like to have a high percentage of successful trades and make a little bit of profit each month. Other traders go for the long shots by buying out of the money options. These traders have a much lower percentage of winners, but when they win, the trades may triple or quadruple in value. Whatever your particular taste is, your goal is to alter the risk graph to meet your particular goal and trading style.

During lesson 2, we already demonstrated how to use the "find a trade" method by going to the Single Find page and then seeing our results in the Search Result page. This search gave us a list of potential trades. We selected a row by clicking in row of the trade. This caused the trade to appear in the bottom part of the screen. Then we clicked on the View button. Clicking on the View button caused the trade to be transferred to the risk graph.

Building a Trade

If you already have a good idea of the strikes and expiration dates you want in your trade, the fastest way to create this trade is to go to the Chain page and select the strikes.

For instance, some people may like to do credit spreads each month. If they are bullish, they will do a Bull Put spread. If bearish, a Bear Call spread. Or if they think it will go sideways, they will do both at the same time, which is called an Iron Condor.

Let’s say for example that believed that QQQQ was in a long term decline and had made a retracement, but it was ready to begin going lower again. So with QQQQ trading at 36.57, you believed that it was either going to start heading lower, or go sideways. So you decide to play it safe a wanted to sell a 38 call and buy a 39 call against it. You are hoping that both options expire worthless. This is a credit spread trade called a Bear Call spread.

To build this trade, go to the Chain page, type in the stock symbol QQQQ, and click the View Chain button.



The grid will fill with all the options which were available for trading that day. On the left column you will see “minus boxes”. Options are grouped by expiration date and by type. You can click on the box to minimize those options if you don’t want them to clutter the grid. Options with a blue background are deep in the money, and gray background are deep out of the money. Options with a lighter color background are ones that are near the money.



With this symbol, QQQQ, you will notice that there are two options that are calls with a 38 strike. The UQQ options are non-standard and the QQQ options are the ones you want. You can tell this by which ones have the most volume and open interest. Click on the QQQFL row, and then right click on it to copy it down to the Build A Trade section. Then click on the QQQFM row, and then right click on it to copy it down.



Down in the lower Build A Trade section, change the quantity of the QQQFL option, that we are selling, to negative one (-1). Click on the “Copy To Risk Graph” button to view the trade on the Risk Graph page.

Saving your trade

In order to save your trade, use the File menu. Click on File and then click on Save As. A window will pop up and you can select the directory in which you want to save the trade in and the file name of the trade. All trades are saved with an .xml extension. Please note that on the upper right corner of the risk graph page is a field called Trade Name. That is the default name of the trade. If you found the trade by searching, such as using SingleFind, then a default trade name will be created. If you create a trade using Build A Trade then you can optionally enter the trade name there.

Please note that on the file save dialog box, in the combo box called "Save as type", there is an option to save the trade as HTML. This means that it will save the file in html and also save the image of the risk graph to disk. Then you can open the saved html file in your browser, or take the trade and post it on a web page or email the trade as an attachment to your friends and trading partners.

Opening a saved trade

After you have saved your trade, you can load any other trade from disk. The loaded trade will replace the trade which currently exists on the page. So be careful to save your existing trade if you have many any changes to it.

Editing a trade

A trade may have as many legs as you want. To add a leg to an existing trade, repeat the same steps when doing the Build A Trade, but click on the button labeled “Add to Current Risk Graph”. Do not try and manually add any legs to the trade except for stock.

To add stock to the trade, click on the row with a star on it. In the Type column, select Stock. In the Quantity column, enter the quantity. Then press the up arrow on your keyboard to add the new row.

If you need to change the Cost Basis of an item, click on the box and start typing the new price. It will automatically change to edit mode and allow you to edit. Please do not change the strike, expiration or symbol values as they are all interconnected. If you want to delete a row, highlight the row and press the delete key on your keyboard. If you want to temporarily hide a row, check the Hide checkbox for the appropriate row.

To make any changes active, which may recalculate the trade, after you have made your changes, click on another row. Any edits that you make on a row are not active until you move off that row on to another row. The screen will not acknowledge your change unless you either change to a neighboring row, or you click on the Update Prices button.

A current value of 0.0001 could also mean that the bid or ask for that option has dropped to zero. That it is so far out of the money that no one is trading it any longer.

Further Study

This lesson series is designed to give you the basics. It has quickly shown you the fundamentals of how to create, edit, save and load risk graphs. If you have further time, then investigate the Repair and Analyze buttons to get a taste of other things that OptimalTrader can do. You may also want to view other graph types by selecting a different Chart type to view Stock and Implied Volatility graphs. Also try the zoom selector to see a more or less detailed graph. Try clicking on the break even dates to show or hide the graph for that date.

End of Lesson 3.