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 2080. It was created by buying to open the 2125 Call with 3 weeks to expiration and selling to open the 2120 Call. This provided a net credit of $1.50 with a total risk of $3.50. 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 40 points from the current trading price.

This position was opened on Monday and a Good-Til-Canceled (GTC) order was set on Tuesday to close the position for $.80.

A week and a half later, the SPX had moved up 45 points and was trading at 2125. This move, resulted in a current mark of $2.90 so we had a “paper loss or drawdown” of $1.40.

The three questions that we routinely ask as we evaluate our positions are:

Do we have a profit in the position?- After holding this position for one and a half weeks, the answer is no.

Do we have price pressure on this position?- Very slight because despite a 40 point increase in the index, we had built enough buffer into the position to allow for that type of increase and still be very close to “at the money.”

Do we have time pressure on this position? – Very slight because there are still one and a half weeks until expiration. There is time to develop choices on our continued strategy of managing this position.

Option 1- Patience is a Virtue- Since we were not yet in the expiration week, many of our clients chose to do nothing and waited for the downward bias indicated on the charts.

Option 2- Buy Some Time- Some clients were not inclined to wait but wanted to “buy some additional time.” They rolled the position out two additional weeks to allow for more time for the index to decline, take our position out-of-the-money and create a profit.

Option 3- Roll out and up- In addition to buying more time, some clients also chose to increase the strike points to take the position out-of-the money and increase the likelihood of a timely profit.

Here is what happened… SPX declined to 2015 with a week left until expiration rewarding all clients regardless of which option they chose above. A decline in the index benefits everyone in this example because the vertical call credit spread is a declining bias strategy.

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.