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.
We at Options Money Maker deploy a variety of tested and proven techniques that have produced consistent returns for us over time. The specific techniques utilized often depend on the status of the current market. When we have studied the charts and are not sure exactly which way the market might move and the volatility index is reasonable, we often utilize a technique that combines two diagonal spreads, one PUT spread and one CALL spread to realize profits regardless of the directional movement.
We established two diagonal spreads on SPX with the index trading at 1970. We chose the 1950 Put Spread with expirations of September week 4 for the short leg and October week 1 for the long leg. The Call Spread was established at 1990 with the same expirations as the Put Spread creating a “sweet spot” of 40 points between the two spreads. Ideally we would like the index to stay within that 40 point range which would allow most or all of the credit on the two short legs to expire. The amount of credit received on the two legs was $18.55 all of which was set to decay away over the next 7 trading days. The net debit (what we paid) for the position was $17.30.
What Happened Next…?
The long Put and Call were selected with similar delta values so that they would largely balance each other out regardless of the movement in the market. Over the next week the SPX bounced up and down as usual without any dramatic movements that took the price outside of the “sweet spot” of our position. We had placed a Good-til-Canceled order to close the position at $20.80 which represented a $3.50 profit or 20%. With only 3 days left to expiration, the short Put and Call went into a rapid decay mode and the long Put and Call canceled each other out fairly well creating the expected 20% profit when our automated trade was executed.
Some Investors Play the See-Saw Game…
Our techniques are not speculative but some investors may choose to close out one of the spreads on a move up or down and then close out the remaining spread when the market reverses. This may make sense if there is enough time buffer built into the position to respond if the market does not move in the desired direction. The more conservative approach is to not “over manage” the positions; leave both spreads in place and make the profit on the natural time decay of the short legs.
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. Want to make a profit on a high percentage of trades and manage unfavorable trades from a loss to break-even or an eventual profit? We sure do! How about you?