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.
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We at Options Money Maker often deploy a vertical credit spread under certain market conditions. This case study involves the index RUT with expiration dates that were 6 weeks into the future. RUT was trading at 1160 when we chose to open a call vertical spread with the short Call at 1200 and the long Call at 1205. We received a credit of $1.30 on this trade. This is a downward bias position with the index trading at a defined point of resistance. Our goal is to have the index continue to trade below 1200 and wait for the time decay to create a profit. Rarely do we allow these positions to go all the way to expiration but rather, take reasonable profits as soon as they are available.
What is the logic behind this trade…?
We don’t just establish a downward bias position and “hope” that the market goes down. That would be hoping for luck or speculation. This trade was established for multiple reasons. A careful review of the chart revealed multiple indicators that favor a downward bias. Reading the charts correctly is an important skill to learn. We teach you how to read charts like the masters. RUT also has a tendency to be a “leading” indicator which means that it may experience a move downward before other indices such as SPX or NDX. We also established positions that were 6 weeks out so that we had different “waves” of positions creating profits at various times. The significant time to expiration as well as the buffer created in the strike price to balance a move upward, also allows for adequate forgiveness to manage the position in the event that the market moves contrary to the anticipated bias.
What Happened Next…?
Over the next week, RUT declined to 1140 which lowered the credit on the position to $.50. This allowed our investors to buy back the position and close it out for an $.80 profit.
Closing a trade for a profit is never wrong…
Some of our investors chose to remain in the position longer and close out for a profit of $1.00 because of the expected downward bias of the index. It is never wrong to close out a position a little sooner for a profit. Not only does this increase your “winning percentage” it puts capital back in your hands again to reinvest sooner than later.
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?