Case Study of the Week

This case study is based on actual trades using the strategies taught by the team at Options Money Maker.  Our focus is to teach traders a consistent and conservative approach to trading credit spreads, debit spreads and other combination spread strategies to earn higher than average returns.

We believe that there is no better manager of your money than you, armed with the education and experience to create great returns and do it with peace of mind.  We also believe that there is no better way to learn than to “mimic the masters” and then actually do it yourself!  These case studies are designed to be a supplement to your education and show you real examples of the trades we open, close and adjust while minimizing risk, eliminating fear and growing a big account.

Case Study

You do not need to be Albert Einstein to follow the rules and execute options trades with the help of our experts.  Regardless of your level of experience, you are able to leverage the vast experience and years of success of our master traders.  Some people may not take action because they don’t think they are smart enough to execute the trades. This is very far from the truth. We assist people with all different degrees of ability and develop them into successful traders. A bigger obstacle to overcome is our emotions that sometimes influence us to make bad decisions.  By adhering to our basic set of rules and executing the appropriate management techniques, trading can be very low stress.

So let’s use the example of opening a Put debit spread on SPX which is a downward bias position.  We opened up a 5 point spread of 2045/2050 for a net debit of $2.30 when the index was trading at 2060 and there was 3 weeks to expiration. In this case, the SPX made a strong move upward.  One of the nice features of a Put debit spread is that if the market moves contrary to your desired movement, the short Put increases in value to largely offset the decrease in value of the long Put.

What happened next…?

The SPX moved to 2080 but the value of the spread only decreased to $2.00. When the individual legs were evaluated, there was a significant “paper” profit in the short Put and a significant “paper” loss in the long Put. We gave our investors the option of “working the trade” to generate a profit. Some chose to close the short Put for a realized profit and leave the long Put to manage. This did not require Einstein skills, just basic skills that can be executed by an average person. That is a good transition to the next move which is to cost average. By adding two contracts to the initial two, the average cost basis declines, which increases the chances of a profit. The index does not have to move as much to get back to the new average cost.

What Happened Next…?

Not all of our clients chose to work this position. Many chose to do nothing since there was still nearly 3 weeks to expiration. The charts still indicated a likely move downward in the index which would create a profit in the position. In fact the index did move down 10 points two days later allowing those who had cost averaged to exit the position for a profit. Those who held the original position were better positioned to make a profit but had to wait for further time value to decay or for a continued move downward to achieve a reasonable profit.

It is great to have choices! There is no right answer.  Do what you think is best for your account and never look back!

 

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