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

We at Options Money Maker are not speculators or day traders. When you have a sharp movement in the market one direction or the other there is a natural tendency to expect a rebound or a “retracement.”  Speculators might buy a call or a put depending on the anticipated direction to leverage the anticipated move and make a quick and dramatic profit.  That works if you are sure you can predict what the market will do. We don’t attempt to do that. We take what the market gives us in a defined, methodical approach to investing that includes multiple options and management scenarios. When the market had decreased sharply, we chose to initiate a Put Credit Spread on RUT for two reasons. We felt that the next significant move could be upward and this is an upward bias positions and RUT has a tendency to be a leading indicator and might move in that direction in advance of some of the other indices. We opened an 1145/1150 Put Credit Spread on RUT with the index trading at 1160.

What Happened…?

All indications were that the RUT would rebound or increase but instead the global selloff resulted in another significant decline to around 1100.  If we had bought a speculative Call as opposed to establishing a Put Credit Spread we would have experienced a significant paper “draw down” on that position. Because we hedged our bet by using a tried and true Put Credit Spread with significant time buffer built in, we experienced minimal draw down, did not panic and waited for the next move.

What Happened Next…?

The market did not cooperate for the speculative day traders. Rather than conduct the anticipated retracement, the index continued down to just above 1100 but our investors had a position that “hedged” their draw down with built in time to wait for a correction. Three days later, the index had rebounded to 1155 which created a profit in the position. We closed the position for a profit and had the peace of mind of not being enticed to create speculative positions.

Greed is the Downfall of Many Investors…

Our techniques are not speculative and we do not have a “get rich quick “mentality. We establish solid positions based on directional bias and build in strike prices and expiration dates that allow for forgiveness.

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?

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