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 either a Call vertical credit spread or a Put vertical credit spread depending on the directional bias of the market. We have also discussed that these techniques work well on a variety of indices such as SPX, NDX and RUT. There are different characteristics of each index which allows the investor to choose a position that fits their strategy. For example, the NDX has a tendency to trade in a wider range and make more dramatic up and down moves than SPX. RUT has a tendency to be a “leading indicator” and move in a certain direction before the SPX or NDX.
This case study illustrates the strategy of varying your expiration periods of your positions when you have multiple trades in play. We established a Put vertical credit spread on RUT which is an upward bias position. The index was trading at 1218 and we bought the 1195 Put and sold the 1200 Put with an expiration 3 weeks out and received a credit of $1.30. We also already had a Put vertical credit spread in play on SPX with 4 weeks to expiration.
Here is what happened… RUT moved up four days later to 1236 which lowered the mark of our position to $.65. We closed this position for profit of $.65 which represented an 18% profit on cash at risk in only four days.
Variety is the Spice of Life… There is a variety of reasons for choosing variety with your trading process. By choosing to establish trades with both SPX and RUT you diversify your approach in the event that the market does not move as anticipated. These indices do not necessarily move in “lock step” together. Even if they follow the same general bias, one may move sooner or more dramatically than the other. Varying the expiration date avoids any confusion on the part of your trading platform when you have multiple positions. It also allows you to take profits at different time intervals which allows you to cycle positions faster, reinvest and take advantage of compounding.
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.