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.
A very successful strategy of Options Money Maker is the vertical credit spread. Previous case studies have described positions using a Call vertical credit spread which is downward bias position. The same success can be accomplished when the bias for the market is to move upward by using a Put vertical credit spread.
A vertical Put spread was established when SPX was trading at 2065. We opened the position by buying the 2035 Put and selling the 2040 Put with 4 weeks to expiration and received a credit of $1.40. We built in forgiveness into the strike prices in the event that the index moved lower. By remaining out-of-the-money, this position would still present a profit potential due to time decay. Through a detailed analysis of the chart we documented that SPX was trading at a point of support which provided the bias for a potential move to the up side.
Here is what happened… SPX moved up the next day to 2090 which lowered the mark of our position to $.85. We closed this position for profit of $.55 which represented a 15% profit on cash at risk in one day.
It is a beautiful thing… it is always fun when the market moves as anticipated and you are able to make a nice profit in one day. It is also nice to know that you can make a profit regardless of the direction of the market by choosing a Call or Put strategy that favors the directional bias based on a careful review of the charts. This allows you to continuously have positions in play to take advantage of compounding as opposed to always waiting for the market to increase. Could the market have moved against us…yes. That is why we build in forgiveness in regards to time and strike prices. Could we have waited longer and perhaps gained more profit due to time decay…yes. We like the strategy of taking a nice profit and moving on…how about you?
There was no one right answer in this case. The decision each trader makes is based on their personal views and attitude towards risk. This case study points out the need to learn how to think like a trader versus just following a set of rules.