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

Many of our investors recently held a Call Credit Spread for SPX at 2080/2085 with an expiration date that expired in 5 days. The average credit was $1.30 and the index was trading at 2080. This is a downward bias position and our investors wanted the index to trade below 2080 and create a profit through the time decay of the options. With 4 trading days to expiration, the speed of time decay accelerates and the position could be closed for a small profit of $.20.  Most of our investors held the position one more day to gain a larger profit.  This seemed like a good approach given the technical chart indicators still showed a downward bias.  A little patience and one more day of time decay would likely create a much better profit.

What happened next…?

Despite our best effort to predict what the market will do, we cannot be guaranteed to be correct all of the time.  The next day, rather than the index continuing to decline, it actually rose by 23 points with a closing price of 2103.   This increased the value of the credit from $1.00 to $3.00 turning a small paper profit to a significant paper loss. Our total risk in this $5 spread was $3.70 so a plan with multiple options needed to be developed to protect against a possible loss.

What Happened Next…?

We had undesirable answers to our 3 key questions used to evaluate a position…

Did we have time pressure? Yes.

Did we have price pressure? Yes.

Did we have a profit? No.

Options included rolling out the position to gain additional time, rolling up the position to a higher strike price to enhance chances of a profit, or to wait another day or two to see if the index declined.  Those investors who chose to do nothing were rewarded. Over the next two days the SPX declined by 53 points which allowed them to close the position for a profit of $.80. What a difference a day or two makes! Moving from a paper loss of $1.70 to a profit of $.80 was a very desirable reward for a little patience.  Why would investors be willing to do nothing and hope for a significant decline in the index? Because they knew that if that did not occur that they could still execute the other management techniques mentioned above. Would you have known what to do? How would you have managed this situation?

What is Keeping You From Taking Action?

Click Here to Learn How to Trade Like the Masters

Comments are closed.