GDX Strangle Case Study – Full Loser to $297 Winner

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Strangle: In this video update, I want to go through all the closing trades that we had today on August 10th. Now, I know this video is sent out a little bit late. We had some car trouble as we’re traveling to Virginia.

We had turned around and head back to the house and pick up a different car because I think the wheel bearing on one of our other car has gone. A little bit longer to get to Virginia here in visiting the family this week, so this is the reason why the video is out late. But nevertheless, I want it to get to you guys.

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Today, we went through and closed out two major positions that we had, one in SLV and then the other in GDX. Now, we’ll cover SLV real quick, but then GDX is the one that really, you want to stick around for because this is going to be a neat little case study video. And it might go a little bit longer here, but if you ever wanted to learn and see the proof in the pudding of how adjustment strategies work, then this is the video for you.

We’re going to probably be doing a podcast on this as well because this is a cool explanation of actually how this whole thing works with adjusting trades that move against you and still being able to make some money. And I think that's the key point here that we want to get across.

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First of all, we did go ahead and closed out of our September strangle here in SLV. We bought back the 21 calls and the 17 puts, bought those back right at our profit target of $.20 for each of those, so $20 for each of those. We sold these for about $42 or so, about $45 or so, and then we ended up taking over all on this side of the trade about a $110 profit.

Now as you know, SLV and GLD, both of these have seen big drops in implied volatility. You can just see the decline in implied volatility that SLV has had for basically July through August has been huge and the stock is more or less going sideways since we entered the trade. In this case, we’ve seen it work well in our favor, plus implied volatility has worked well for us in the same vein.

Now, as far as GDX goes, what we did this morning is we had a bunch of closing trades. Now, what I did (and I usually do this sometimes when we have a lot of closing trades rolling off) is that instead of just throwing in there some arbitrary profit and loss for each leg, what I usually do is just total it up for one single position.

Just so you guys know, the straddle has the one that has the total overall profit and loss from all of the adjusting and everything that we did for basically the July/August position because we rolled the contracts from July to August, so it’s still this continuation of this position. And now today, we consider this entire position closed. And what’s cool about this is that we did take in a profit of $297 after everything was said and done. I'll show you all of that here in a second.

But again like I said, the closing trades that we have today, there’s a bunch of different ones that we had, we bought back single legs, so we bought back the 29 calls for 262, then we bought back a set of the 27 calls that we’re in the money for 455, and then we bought back the straddle for 198, and then finally, we bought back a couple of little single 29 puts for $.10 apiece. But again, everything is totaled up into this 279 total profit overall. Now, a question you might be asking yourself is, “Okay, how do we get to that number and what were the trades that we got into?”

Here's a look back the last 90 days here in GDX. And these are all the positions in our account. And you can see obviously this is real money, real-time. These are all the fills that we had, so 31 different fills, 24 different orders that were placed in here. And you can see if I go back in time here that actually, this position started here where we have begun entering these trades back on 5/25.

This is when we have started selling some straddles and strangles around where the market was, and you could see that we continued to open up new positions along the way. As we started building this position over the course of a couple of days, we started entering the original position at 5/25, then we started adding to it at 6/3 etcetera and started building like legging into this position.

Remember, our original position – This is what’s cool about this. Our original position was the 27 calls and the 18 puts, and then we added the 29 calls and the 21 puts. Just think about this. Our first short strikes, when we added this position on 5/25 which is right here, this is the day that we started adding this position in and started building this portfolio, and look where the markets went since then.

I don’t know what you call that, but that’s 100% against you. We have a position that moved 100% against us, and we started adding positions, and we sold 27 calls which are here, and then we sold 29 calls which were here. You can see that the market clearly moved against us. Now, our original position was trading the July contracts which are this red dotted line here.

At July expiration, we started to get challenged. And even before then, we began to get challenged. But the point I’m trying to make here is that this thing never actually went our way. We had to fight this one the entire time. Had we done nothing at all, we would’ve ended up with a huge loser versus what we ended up doing.

If you look at the trades here – And feel free to pause this video. I’ll just put it right here. Feel free to pause this video and dig down deep into understanding what we were doing here before because I think it's important how we look at these adjustment techniques. But for example, back on 6/8, what we ended up doing is ended up closing out of our 18 puts (and you can see it’s a closing order) and then we opened out the 24 puts.

All we did was roll up our contracts from 18 to 24. Remember, we originally got into these 18 puts, we sold them for $21, now we bought those back for $3, and we resold the 24 puts for $67. Now technically, the 18 puts, that’s a profitable trade, that’s like a single leg profitable trade. I don't count it that way. I know a lot of other guys do.

I think it overinflates their numbers when they count those single little individual legs. I consider the whole thing to be one single trade. Do we make money or not on the whole trade. Because I could count all of these as little profitable trades and have 36 different profitable trades, and that would skew my numbers dramatically, but that’s just not how we do it.

But the whole idea here is that we just continued to roll up our puts. And you can see we did it again here where we rolled up and closed out of our 21 puts, and then we rolled those up to 25, and we just continued to do that time and time again. We took our 22 puts and pushed them to 26, and we took our 24 puts, and we moved them to 27, and our 25s up to 28, and 27s up to 29. You can start to see exactly what we did the entire time.

There was nothing magical about what we did. It’s just every couple of days, as the market continued to move against us, 6/22, 6/27, 7/1, 7/5, 7/6, we just continued to get up strikes. And the entire time – This is what the key was. It’s that every time that we did this, we took in a credit and that helped build this massive credit that we had in GDX that helped alleviate the pain from going ahead and buying back a lot of these positions, some of which were deep in the money.

That’s a key, the key thing that not a lot of people I don’t think to talk about. It’s this massive credit that you can start building here. And you can see these are all the credits that we took in. I’ll just scroll up here, so you can see the next half of doing these. But all of those credits just actually buffered our position and allowed us to maintain that base.

Now our original position, let’s say we did 27, 29 calls which were here and we took in whatever credit, but now that we take in more credit, we just keep moving this breakeven point out further and further and further because that credit just extends the trade vertically up and down.

We get to July expiration; the stock is closing at 29. We still have excellent implied volatility at July expiration. What do we do? Well, we go ahead, and we roll all the contracts out to the next month, taking in massive, massive credit. You can start to see these diagonals which are the ones that we began to move positions from one month to the next. We were close out of the July calls and transferred to the August, close out of July and move to August, close out of July and move to August.

And we did these with calendars and diagonals and the whole deal, and the entire time that we’re doing that, taking in credit after credit after credit after credit. And this is all archived. Everything in here is now available. You can see every single day, go back to these dates, check me if you want to, double-check my numbers if you want to. It’s all in there. It’s all legit. We talked about it every single time.

And we just continued to roll and take a credit and extend the trade. Now, was it hard to do all of this adjusting and was it hard to manage these positions? Sure, it’s not a cake walk to do this. But it’s very simple as far as the thought process and the mechanics behind it. And hopefully going through this, you understand how we do this. It’s the same thing that we’ve done over and over again, that we’ve talked about time and time again.

In July, we went ahead and said, “Okay, let’s roll the trade out to the next month. Let’s extend our trading duration.” And because we did that, we were finally able to hold onto the position long enough to see that significant drop in implied volatility which is really what we needed. And that happened early in the cycle which was great. We just need a little bit more time decay. And now as we got closer to expiration, it just seemed like a good idea today to take this position off.

And now you can see that implied volatility here is at zero which is about as low as it’s going to go. It’s not going to go negative. Implied volatility is the lowest that its possibly going to go, we took advantage of implied volatility which is exactly what you want to do, and even though we had to buy back all of our positions today, basically as the stock was rallying which was against our positions, we ended up with an overall win on this thing after making adjustments which just goes to show you again that the name of the game here is implied volatility, selling premium, extending your trading timeline if you can, and always adjusting for a credit.

And when you do that, even though you get in at exactly the wrong point (because that’s exactly what we did, we got exactly at the wrong point) and the stock moved completely against us, we still were able to take money off the table and make a winning trade out of this.

Hopefully, this has been a cool little case study and look at GDX. And if you think this has been helpful, please add a comment in the comment section or head on over to our new page which is the optionalpha.com/ask page. And you can either ask a question there, leave me a voicemail, or you can leave me a testimonial there or something like that if you think this has been helpful to understand it or if you went through this. I got a message today from one of the members that said, “I didn't know if GDX was going to work out.

I kept rolling; I kept adjusting. And at the end of the day, it ended up working out well.” Now, they believe in this thought process now that they’ve been through it themselves one time. Hopefully, this has been a superb video. As always, hopefully, you guys enjoy these. If you have any comments or questions, please let me now. Ask them in the comment section right below. And until next time, 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.