Case Study Of the Week

This is a series of actual case studies associated with following the investment strategies of the experts from Options Money Maker.  We take a consistent and conservative approach to utilizing credit spreads, debit spreads and other combination spread protocols to routinely make high percentage returns  at much lower risk than other investment strategies. 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 helpful supplement to your education.

Case Study

A very successful strategy of Options Money Maker is the vertical credit spread.  This case involves a Call Credit Spread, which is a downward bias position, on the index SPX.  The position was established when the index was trading at 2110. It was created by buying to open the 2145 Call with 3 weeks to expiration and selling to open the 2140 Call. This provided a net credit of $1.40 with a total risk of $3.60. This credit spread utilized the classic safeguards of our  techniques. We built in time for the position to make a profit by using expiration dates that were 3 weeks out.  We also built in “forgiveness” in case the index moved upward, by selecting strike prices that were 30 points from the current trading price.

This position was opened on Wednesday and a Good-Til-Canceled (GTC) order was set on Thursday to close the position for $.70.

On Friday, having been in the position less than 2 days, the SPX had decreased by 10 points. This move, along with a small amount of time decay resulted in a current mark of $1.00 which was $.40 favorable to our original credit of $1.40.  The weekend was looming in front of us with an unstable world financial issue playing out in Greece.  Here is what some of our clients chose to do.

Option 1- Cash is King- Some of our clients chose to cash in the $.40 profit, go to a cash position over the weekend and not give the decision another thought. YOU CAN NEVER GO WRONG BY TAKING A PROFIT.  People who trade on emotions, the news, or hold out for a larger profit lose far more times than they win.

Option 2- Time is on My Side- Some of our clients held the position knowing that they had 3 weeks to expiration of the credit spread. This provided confidence that regardless of what happened on Monday, they had adequate time for the position to create a more favorable return than $.40.

Here is what happened… the US markets declined significantly on Monday including a 42 point decline in the SPX. This moved the mark on our credit spread position to $.60 which resulted in an $.80 profit.

What if the market had moved upward? Those holding the position would have had the peace of mind to know that they had the credit spread structured in a manner relative to the strike prices and expiration dates that would likely result in a profit. They would also be supported by a selection of management techniques that may be deployed when the market moves contrary to the anticipated bias.

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.

 

Comments are closed.