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

Let’s give credit where credit is due. What if you could get an advance of cash on your credit card without incurring any fees in advance?  Then what if your advance was $1000 but you can pay the credit received back in full for only $800?  That would be a great deal you would want to do every week right?

That is essentially what we are doing with our credit spread technique.  With a credit spread, you are establishing the directional bias of an index like NDX then choosing to open either a Call credit spread (downward bias position) or a Put credit spread (upward bias position) The credit spread is established via buying an option and selling an option at different strike prices with the same expiration date. The position allows you to take a credit (cash) into your account at no cost other than your broker’s fees to complete the transaction. The position is designed to take advantage of the time decay of the position while having the index remain out-of-the-money.

Case in point is a Call credit spread opened this week by many of our investors on NDX.  The index was trading at 4325 and all technical indicators revealed a bias to the downside.  The Call credit spread was established via buying to open the 4430 and selling to open the 4425 with 3 weeks to expiration.  Our investors received $1.40 of credit into their accounts for establishing the position.

What happened next…?

We want the position to be out-of-the-money with the index trading below 4425 at expiration for our investors to be able to retain the entire $1.40 credit in their accounts.  We have build buffer of movement and time to increase our chances of this happening.  The index would have to move up around 100 points or more and remain there through our expiration period for this position to be problematic. We normally don’t hold a position to expiration.  We look for a move in the index in our favor and close the position for a nice profit prior to expiration, take our cash back and move to the next opportunity.

What Happened Next…?

As anticipated, the NDX made a move downward over the next two days that reduced the value of the credit in our position from $1.40 to $.80.  Many of our investors chose to close the position, take their profits and start over. This represented a 17% profit on cash at risk in just 2 days.  It is the equivalent of paying back a $1.40 advance on our credit card with only $.80. The difference of $.60 is our profit. We encourage our investors to take these fast profits and move on. Some choose to hold the position longer for a potentially higher profit. That is their personal choice. There is no one perfect answer.  Our stance is that you can never go wrong by closing a position for a profit!

What would have happened if the NDX had moved up significantly rather than down?  There are no guarantees to accurately predicting every market move.  The answer is very comforting for our investors. Number one, due to the buffer we have built into the position, the index must move significantly in the unanticipated direction before our position become problematic.  If that occurs, we teach various management strategies such as rolling the position out to create more time buffer, or adjusting the strike prices to turn the position into a profitable scenario. Do you have that kind of confidence and comfort? Our investors do!

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