thinkorswim® paperMoney® Simulated Options Trading

Narrator: Hello, traders. I'm Jeremy Kuhlman. Now in this video, I'm going to show you how to practice trading options using thinkorswim^® paperMoney^®, a virtual trading simulation platform that lets you practice trading without risking real money. And it's also a great way to learn how to use thinkorswim.

Once we're logged in, I'm going to show you some key functionality that options traders should be familiar with. We'll start out with an option chain, and then I'll show you how to buy a single option as well as how to enter a spread trade. And finally, I'll show you how to analyze a position's risk and reward using the Risk Profile on the Analyze tab.

So, let's jump in and get started.

Animation: thinkorswim home page appears.

Narrator: Now each account does start with $100,000 and today we've selected the margin account, but you could certainly select the IRA if that's the type of account you want to test out.

We're going to go ahead and jump in and look at some options trading techniques in this platform. Come up here to the Trade tab, and I'm going to go here to the All Products subtab. And you notice the symbol box here is asking us to enter a symbol. I'm going to click in there, go ahead and type in Microsoft, MSFT, for this example, press enter on your keyboard and that's going to pull up our option chain.

Now just to give ourselves a little more real estate here, we're going to go ahead and minimize the left sidebar. And now you can see along the top here we have the price of Microsoft, last trade $283.96, down $3.22. There's our current bid and ask. Below the stock there, we're going to see our option chain. And you can notice here some of these options are yellow and some of them are white.

Well, the yellow options are weekly options or nonstandard expirations. And the white options are your standard end-of-the-month options. Looking from the left to right here, you can see we got the 21st of April of 2023. That is 16 trading days left and you see actually as I hover over that, it tells you days until last trading day. And this contract is for 100 shares. That's a standard option contract. If you ever see something different here, it means it's been adjusted in some way.

Now to open the option chain, we're going to go over here to the left-hand side, click on that little arrow next to the date and we're going to look at this option. In the center here, you'll notice we're actually only showing four strikes. That's the default setting here in thinkorswim. If we want to see more strikes than four, we can click there and go down through some preset quantities or we actually can kind of select any quantity we'd like by deleting that number there and typing in a different number.

I'm going to go ahead and type in 25, just as an example. You press enter after you do that and now you can see our option chain is showing 25 strike prices.

Now the left-hand side of your option chain here is the calls and the right-hand side is the put options. And, over on the left-hand side and the right-hand side, you can kind of see there's this highlighted purple area. Well, those are your in-the-money options. As we mouse down over here to the black area, we'll see those are the out-of-the-money options. So, these are your out-the-money calls.

Now placing a trade is actually quite simple in this platform. What we want to do is pick our strike price and, for this example, we'll just buy a call option. Microsoft's down a bit, $283.95 now. So, let's say we want to go ahead and buy the 285 call. What I'm going to do is mouse over the ask price. You see it's $5.55 right now and I'm just going to do a single left click on that price. That'll open our Order Entry Tools down at the bottom of the platform. And you can see we've got a long green buy order. You see here, it says buy SINGLE option. By default, there's a 10-contract quantity and we have a date and a strike price. Again, it's a call.

Now 10 contracts might be a little bit large so, maybe we want to adjust the default. Very simple way to do that, we're just going to go ahead and delete this order temporarily. Come up here to the upper right-hand corner of the platform and we're going to find this little gear wheel and we're going to go ahead and select Application Settings. Now we're going to come up here to order defaults and go ahead and select options. Now if you notice on the right, the default quantity orders right now is 10. I'm just going to go ahead and change that over to one. Come down to the lower right-hand corner and click Apply settings. I'm going to come back to that exact same call I was trading before and click on that and guess what? This time it's one contract over there.

Now, let's follow this over to the right, 285 call. By default, we pull up a limit order for you and we actually fluctuate that limit order with the ask price. You can see it's actually ticking along here at the bottom. Now, if we wanted to put in a lower price than the current ask price, we can actually click in this field. You can highlight the numbers and type in a price, like $5, enter, or you can actually use the plus minus here to adjust your price. Let's go ahead and try to send this order as a limit order below the market at $5.

We're going to keep it as a DAY order, but if you did want this order to last for longer than the trading day, you can click on that and switch it over to be good 'til canceled. Come down to the lower right-hand corner, find the Confirm and Send button, and then review our order one more time before we send it out. Just to make sure we did everything right, we can see we're buying one Microsoft April 23, 285 call at $5 limit order. I'm going to go ahead and click on Send there. And now to check the status of our working order, we're actually going to want to move right up here to the Monitor tab. And guess what the Activity and Positions page now populated and we're going to see we got a working order here. It is working at $5, the market price is $5.47. So, unfortunately, we're not going to get filled on this and, maybe later in the day, we would.

So, let's say we actually want to change the price and go ahead and get a fill. So, what we're going to want to do is right click on the order and you can actually cancel it here or you can cancel and replace it. This is how you can edit the order.

So, for this, I'm going to go ahead and click on Cancel/replace and that's going to pull up a new order. You can see it's actually replacing the other one, adds a new order ID, same quantity, everything is the same, but we're going to go ahead and pull the price back to the market price and that's done by using this little lock here. When that lock is locked, your price is going to stay the way you want it. If you want the price to fluctuate with the market, we're going to toggle that open and you can see it moved me right back to the current market price. This time I'm going to go ahead and click on Confirm and Send. Now that we replaced that order, let's go up here back up to the Monitor tab and we'll notice that we actually have no more working orders and we have a filled order.

Let's go ahead and open up that Filled Order section. You can see that we did buy that option: 285 call and we paid $5.25. If we mouse down over here, you can see that we also have a canceled order. That was our one working there for $5.

So now that we bought that option, let's go ahead and see how we can monitor the position. We're going to go down to the Position Statement. We're going to come over here to Microsoft and we're going to want to open up this section here so we can see our option. You can see we bought the 285 call. We bought one of 'em, we paid $5.25, and the current mark is $5.32. So that is giving us a little profit both for the open since we bought it and for the day of $5.

Next, I'm going to show you a little bit more of an advanced type of options order called a vertical spread. In order to do that, we're going to go back up here to the Trade tab and we'll use a different symbol. We'll just go ahead and use Apple. Go ahead and press enter there and we're going to come back down to our option chain. Let's close up this expiration.

Let's do this in a later expiration. We'll go out here to 19th of May. Now I'm going to want to scroll down. Now again, I'm going to start with the option I want to buy and a mouse over the 160 call. And I'm going to go ahead and right click on that option this time. When I right click, you can see it brings up this menu here. You notice we got a BUY and a SELL. We're going to do a BUY spread here today. We're looking over here and look on the right. You can see there's various types of options spreads available to you.

Again, like I said, we're going to go ahead and use the Vertical spread today. Going to go ahead and click on that there. And now you notice we actually have two lines instead of one, like before. It tells what type of spread we're doing here, a vertical. It shows one line for buy, one line for sell, tells us we have the Apple option, 19th May, 160–165 call spread and now it pulled up 160 and 165 because, by default, thinkorswim pulls up the next strike out of the money when we create a debit spread like this. If, for some reason, we wanted to widen out the spread, you actually can click on the lower option here, 165, change it up to 170. And what you might notice here is that our debit price changed directly with that. The platform is calculating this debit based on buying the 160 and selling the 170 automatically creating that.

If we look down below here, you can see we are currently on the mid-price and if you want to see the natural price, the bid/ask price of this spread, you can go over here and look at its $5.15. This is a limit order. We're going to keep it good for the day because we're going to try to get a fill here. I'm going to go ahead and click on Confirm and Send, review this order. You can see we got our vertical spread here, 160–170 call and we got our break-even, maximum profit, maximum loss listed as well, just in case you want to check that out. Going to go ahead and click on Send and wait for our fill. And there you go, you can see the order just filled.

Now let's go back up here to the Monitor tab, click on that and you can see we actually got our fill here. You can see each individual legs fill price and the total debit of $5.10.

Now I'm going to show you how to close out this position. So, we paid $5.10, we're going to come down again, find Apple in our position statement. Go ahead and open that up and you'll see we have the 160 call and the 170 call here. Now to close out this spread, what you're going to want to do is drag your mouse over both strikes and you can actually then right click and we're going to go up here to Create closing order. Now if you notice there's three different ways that the platform is suggesting we close this out. You can see the first one is to sell it as a vertical. The second one here would be to buy back the single, the 170 call, or sell the long 160 call.

Now for this example, we want to just use selling the vertical spread. I'm going to go ahead and click on that there. And you can see it actually takes us back over here to the Trade tab with the exact opposite trade to close out our spread. Now let's say we want to get a little bit of a profit on this possibly. So, we're going to go up here and click and change our credit price that we want to receive to sell this option to $7. We're going to go ahead and press enter. And you notice as you set that in. Now it might take some time for it to reach $7. So, we want to make sure this order's going to be good 'til canceled, which means that's going to continue to work until it fills or we cancel it. Now go ahead and get click on Confirm and Send.

And then you'll notice here we can review the order one more time just in case we want. We'll click on Send, and I always like to just double check that that order is still working by going back up here to the Monitor tab. And you can see we are working for a $7 credit. Mark price is $5.25.

Okay, next is an area of the platform that I think every option trader should know how to use: the Analyze tab, the Risk Profile. We're going to go up here to the Analyze tab at the top platform, select Risk Profile. And what we're going to want to do here is enter a symbol, and we'll use the same symbol of what we just did that spread for.

So I'm going to go ahead and type in Apple. Press enter, and you'll notice it pulls up this graph here of two different colored lines. We have a pink line and a blue line. What this is showing us is the risk of the spread, we just placed.

The pink line is actually representing profit or loss. And so is the blue line, these are just profit and loss on two different days. If I mouse over the middle here, this is the current price of Apple. You can see in the lower left-hand corner, the pink line represents for 4/5/23, and the blue line represents our expiration date of 5/20/23. Now, at the moment, we're not making really profit or loss on this, but if the stock stayed exactly where it was at expiration, we'd be losing $251.26.

Now this was a bull vertical spread we placed, that means we want the stock to go up. If it goes up and actually crosses over this point right here, which is our break-even—that's the strike price plus the premium that we paid—and continues past that all the way up here to the top, where it plateaus, you'll see our maximum profit and in the lower left-hand corner is $490.

Now if the stock moves against us here, goes down, down, down, crosses break even again, and continues down all the way to the bottom plateau. You'll see we're at our maximum loss of $510. Now notice that there's three dotted lines here in the middle. This line here is the current price. We have a lower end here which is 10% decrease in the stock price. And this upper end and that's 10% increase. Now the reason I know that is I actually come down here to this Price Slice section, and you'll see we have three lines here that also correspond with these three dotted lines.

Now one thing I always like to show is how to check our probability of profit on a spread. This break-even point, we need the stock to be above that to breakeven. The platform has a really neat little tool here where we can follow this over to the right-hand side and find our menu button. Click on that, and we're going to go ahead and go to Set slices. Going to go over here to break-even, mouse over, and select the expiration date. That's the one that's most important to us today, not just today. When I click on that, you see our three lines disappear and we now have one line directly across our break-even price. Now on each side of this line, we have a percentage, 41.63, you might change a little bit and 58.29. This means that we have a 41, basically 41.5% chance of making a profit, a penny or more on this spread, and a 58% chance of losing a penny or more. Very, very powerful tool to help you understand your risk, risk-to-reward, probability, on a vertical spread.

Next, I am going to show you another really cool feature of thinkorswim around options trading. We're actually going to navigate back up here to the Trade tab, back to the All Products subtab. And just for the purpose of this, we're going to go ahead and minimize this option chain. And we're going to locate down here where it says, Today's Options Statistics. Go ahead and expand that.

Now what the platform does here is gather data about all the options that are being traded today. You can see we have call volume and put volume. We have what prices calls and puts are being traded at, whether they're trading at the bid, or lower, or at the ask or above or maybe they're being traded between the market. We have extensive information over here about volatility: 52-week high IV, 52-week IV low, IV percentiles, even a VWAP. Follow that over to the right-hand side, you can also see we have information about how unusual these options are trading. This is called the Sizzle Index.

Really, really valuable information, a wealth of information about the options being traded today, all at your fingertips.

Now lastly, another really cool feature of paperMoney is we have the ability to adjust the position. So, let's say we made a mistake, when we're placing a trade or we no longer want that option in this account. We're actually going to go back up here to the Monitor tab. Then scroll down here to our positions. Let's say we made a mistake here. We bought this Microsoft call and we messed up. We don't want it in our account anymore. Well, we can go ahead and right click on that. And you'll notice there is a little section here that says Adjust position. If I click on that, what it's going to do is pull up this area where I can actually change this quantity.

Now we bought this call option. So, how do we get rid of something that we own. We want to do a negative quantity that will offset that. Now when we bought this, we paid, where is it, $5.25. It actually came up right here. So you're going to want to put in the exact opposite, the exact same price you paid for when you sell this. And I'm going to go ahead and press enter, and you'll notice here I can click OK. And guess what, that is gone. Now it does take overnight for this position to reset. So tomorrow when you pull this up that Microsoft position will go away completely.

Now, another thing we can do with paperMoney is make adjustments to the account. If you look over here on the right-hand side, we have this Adjust Account button. When you click on that, we have several different choices. We can actually reset everything, click that box and click Apply. That resets you all back to the $100,000 account values gets rid of all the positions. Again, does take overnight to reset completely, but all these will go away.

Now another thing we can do here is actually change the amount of money we're starting with. Now, if you remember, both of these accounts started with $100,000. Well let's say we want to start with a smaller amount than that. You can actually click on this drop down, you can see we have some default choices: $25,000, $50,000 increments, but maybe we just want to pick an arbitrary number $10,000. Well, what we're going to do is we're going to highlight this number right here. We're going to type in 10,000. We're going to press enter. I'm going to go ahead and click Apply. And guess what, when we look up here at the top, we have $10,000 in this account now.

Now remember, paperMoney is just a simulation and it will vary in many respects to trading in your live account. Specifically, for options traders, remember, as the bid-ask spread widens, your paperMoney platform will probably give you a fill somewhere in the middle of the market. So, if you're backtesting or trying to test a potential strategy, remember you're getting more favorable fills in paperMoney, and those numbers should never be relied on as future success of that strategy. So always keep that in mind. Now, also the paperMoney platform will not assign a short option position early, and that's also different from trading in a real account.

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