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.
The Hall of Fame New York Yankee catcher Yogi Berra once said, “When you get to the fork in the road…take it! That is the kind of simple flexibility that we at Options Money Maker like to teach in regards to options trading. An example is a recent position we established using the index RUT. With 3 weeks to expiration, we believed that there was a downward bias tendency using all of our key charting indicators. For that reason we chose to establish a Long Put Vertical Spread which is a downward bias position. We wanted to lower our risk, so we chose strikes that were significantly in-the-money. The selected strikes were the 1145/1150 with the index trading at 1125. This position had a net debit of $3.50 which meant that the potential profit on the $5 spread was $1.50. Establishing an in-the-money position lowered our risk in a number of ways. If the index moved upward, we could close out the short Put for a profit and then manage the long Put in a number of ways. If the index moved downward, we can exit the position for a profit and reinvest our capital in a new position.
What happened next…?
RUT made a pretty strong move upward to 1145 allowing our investors to close the short Put of the spread for a nice profit. We recommended doing this when the various chart indicators seemed to show a downward bias as the next move. That would provide us with the best chance to benefit from having a long Put since that leg improves at the rate of its Delta as the index moves down.
What Happened Next…?
The next day RUT made a significant move downward as anticipated and was trading at 1132. This allowed our clients who held the long Put position to close that position for a second, nice profit. In essence, they made money on the move up and then made money on the move down. They saw the fork in the road and took it! Not all of our clients chose to work this position. Many chose to do nothing since there was still nearly 3 weeks to expiration. They were able to close their original spread for a profit. They only received one profit rather than two but were very content to make some money and move on to the next opportunity.
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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