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 the index SPX. This technique works equally as well on other indices such as NDX and RUT. Frequently those indices move in the same general direction albeit at various degrees. There is no iron clad rule in how the market will react but in general, RUT has a tendency to be a leader in directional bias. If it appears that SPX, NDX or RUT are positioned for a decline, it is often RUT that makes the first move. This case involves a Call Credit Spread, which is a downward bias position, on the index RUT in an attempt to take advantage of the tendencies described above.
A vertical call spread was established when RUT was trading at 1260. We opened the position by buying the 1300 Call and selling the 1295 Call 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 higher. By remaining out-of-the-money, this position would still present a profit potential due to time decay.
Here is what happened… RUT declined the next day to 2048 which lowered the mark of our position to $.75. We closed this position for profit of $.65 which represented an 18% profit on cash at risk in one day.
Take the Money and Run… most all of our clients took the immediate profit and did not hold out for a greater profit by retaining the position and waiting for more time decay or a continuation of a decline in the index. In retrospect, some did hold the position longer and received a higher profit. That is a personal trading decision that varies on the risk tolerance of the trader. We remind our clients that you can never go wrong closing a position for a quick profit and that often traders lose their profits by waiting for a larger one.
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.