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

An Iron Condor consists of two credit spreads, one Put spread and one Call spread. The position is designed to have a “sweet spot” with the desire that both positions would remain out of the money. This allows the time decay to create a profit on both spreads. This strategy is deployed when there is uncertainty on market direction and allows for profit regardless of how the market moves.

This case describes an Iron Condor on SPX with the index trading at 2106.  The Call strikes were 2135/2140 ( downward bias position) with a credit of $1.75 and the Put strikes were 2075/2080 (Upward bias position) with a credit of $1.20.  Total credit was $2.95 with 4 weeks to expiration.  There was time built into the position as well to provide buffer for market movement either direction through the selection of the strike prices.

What Happened…

The next day the SPX decreased by 25 points which lowered the credit on the Call spread to $.85.  Many investors chose to close the Call spread for a profit of $.90 which represented a 44% profit on cash at risk. This left those investors with a Put spread with 4 weeks to expiration. Closing the Call spread was performed with confidence because no matter what happened there were good options. If the market increased, the Put spread could be closed for a profit and the investors make a profit on both spreads. If the market decreases or remains flat, investors could choose to add a Call spread back with lower strike prices to complete the Iron Condor once again.  All of these options are made available because of the time built into the positions.

Then What Happened…

In this case there was a market retracement upward 2 days later that allowed the Put spread to be closed for a $.30 profit.  Total profit in this case was $1.20 in 2.5 trading days which represented a 59% profit on cash at risk.


It is Great to Have Choices…

It is interesting to note that some investors chose to simply hold the Iron Condor as originally constructed.  Five days later they were able to close the entire position for a profit of $.80.  This only resulted in a profit of 39% on cash at risk.  Although this was a lower profit than described above, it only required a little patience combined with one order to close the position to create a profit that anyone would be happy with.

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.

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