The 3 Month Option Strangle Adjustment That Turned A Losing Trade Into A Winner

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Option strangle: In tonight's video, I want to go over the two trades that we had today on Monday, November 9th. The first one that we're going to go over is our closing trade of EEM. Now, this is a trade honestly that we've had on for awhile. We put the original position back on in August and rolled the contracts to September, rolled them in October, rolled them in November and just have maintained this trade the whole way.

This is going to be a great case study for why you should keep a position on as long as you can keep taking in credit. After all of the rolling and moving and adjusting that we did with this position what could have been a loss multiple times ended up being a $20 profit.

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Now a $20 profit is nothing to write home about, it's not a big win but it is a winning trade and we did it by systematically adjusting the position just like we always teach inside of our course right here at Today's trade, of course we ended up closing out the November options.

The 32 strike call and put so that we closed out of the straddle. Again, we closed out with a nice profit after all adjustments of $20. I want to go over all of that so you guys can see what that looks like. Here's a look at EEM so you can see what the chart looks like right now and kind of where it's been. You see it's had a huge drop in implied volatility over the last month and a half.

We actually initiated the original strangle trade all the way back on 8/12. Again, this is my real platform. All real trades, not paper trades. We initiated the original strangle back on 8/12 and took in a credit of just $70 but that original strangle was the 27 call and 32 put. We're doing; a nice wide strangle back on 8/12.

Again, just trying to take in some premiums so 8/12 is right about here. You can see our initial trade was right there, the market was low, implied volatility was high at that time but our trade was basically here. The 32 strikes and about the 37 strikes.

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These aren't drawn to scale obviously. We have the 32 and 37 strikes. As the market saw its dip towards the latter half of August we were faced with a position that was getting challenged toward the end of expiration. In fact, the stock was outside of our range. What did we do? We rolled down like we talk about all the time.

Rolled down our call side from 37 to 32 and took in a nice big credit to do that. Again, here's that trade that we did. We closed out of our 37 long calls and then we resold a new opening order, our 32 calls. Again, this was on 8/24 when the market made it's bottom, took in a nice big credit. The same thing, just basically happened.

We just rolled down that same call side, the one at the side of the market moving away from. We took in another credit that adds to our overall credit that we just keep accumulating this entire time period that we're making adjustments. Now, as we got further through the September expiration we realized that the market had turned against us.

Now we had kind of everything pivoted around the 32 strike. At this point we don't have too, much of a credit built in. We get towards now September expiration the stocks moved against us. What do we do? We roll the trade out to the next expiration month trying to take advantage again and just give ourselves more time.

Hopefully implied volatility continues to drop and work in our favor, roll the contracts out to the next month. You can see these next two orders here are calendar spreads which basically are rolling orders. We're closing one side, opening another, closing one side, opening another.

The most important thing is we did the entire thing on both sides for a credit. Even though we are still maintaining that position we're getting paid to roll and continue to build the position out month after month. Then again we ended up doing that from October out to November. Again, back on 10/9. We ended up rolling the contracts out twice to get them out far enough.

Again you can see the overall roll still took in a credit. Back on 10/9 which was right about here when the market was again rallying away from where our stock was at the time. It seems like every time towards the end of the month it would rally away from where our strikes were at 32. We ended up rolling the contracts out again to the November time period.

What that did is that finally gave us enough time for this stock to normalize a little bit, come back into a range that now gave us an opportunity to take some money off the table. You'll notice it took awhile for this trade to develop. Again, the original trade was back here in August and it took, two rolls of contracts out to months to actually get this thing into a position where it could take some money off the table.

Believe me, it's tough to do sometimes to maintain this type of position month after month after month but in the end result is that we ended up taking money off the table at a profit and we were able to adjust our way out of many opportunities to lose.

Had we done nothing at all and this is why I try to teach so many people as part of this membership and what we do here at Option Alpha is that sometimes the worst thing to do is nothing at all, right? You have to just keep active and stay active. The only reason that this thing continued to work was because we stayed small on our initial position size.

We could have lost a couple hundred dollars multiple times, right? Every single expiration month had we just closed it out so; you know that this thing sucks. It's not moving in our direction, could have lost money but we stayed small. That means it was manageable.

We could continue to hold the position, continue to roll it out and after everything was said and done after add up all the credits that we received and then closing it out today for a 250 debit we, ended, up to taking this thing off for a small profit. Hopefully that was a really good case study, a really good example of what we're trying to do here at Option Alpha.

The other trade that we got into today real quick is just a very simple monthly FXE credit spread. We sold the call credit spread in FXE. Again, that's selling to open the 107's and then we also buy to open the 108 calls. That gives us a net credit between those two of .30. We're definitely playing this thing directionally bearish.

Implied volatility is in the 58th rank. You can say we definitely allocated a little bit more money towards this now and we talked about that a little bit in the podcast that's going to be released later this week about why we're starting to allocate a little bit more money to these credit spreads. They end up winning out long term a little bit better than everything else that we do.

We're going to start allocating a little bit more money to these credit spreads and start building a bigger position in them overall. Had a nice little position in FXE start to increase our allocation here a little bit but directionally playing this stock lower. We'd ideally love to see FXE continue to move lower over the next couple days or so and definitely implied volatility drop.

I think actually we entered five of these. I don't know why three, I think our order got split up into ... Just as a side note. I think our order did get split up into two different fields. I believe the correct here is maybe a five or seven contract.

We'll make sure we get that updated by the time that this thing actually goes out so you guys can see that. As always, hope you guys enjoy these videos. If you have any comments or questions, please let me know. Happy trading.

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.