Banking IBB & XHB Profits Early

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Options trading profit: In tonight's video update, we're going to go over all of the trades that we made today on Thursday, February 18th. So we had two closing orders today, just automatic closes that we put in, and then a new order towards the end of the day in JDX. I want to go over those today.

Before I do, I want to talk real quick ... the only position that we do have on for expiration tomorrow that we're just going to leave on and let expire, worthless, is our VXX put debit spread. So we originally had on a put debit spread that was hoping to see the VXX trade below 24, which I thought was a pretty decent level, if the markets did rally back higher. And since they didn't, VXX has stayed higher.

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Now, in this case, probably lose about 400 dollars on this trade, which is a good size, but this was a hedge for all of our other positions. So we made more than enough money to cover the loss from this trade and more than enough beyond that this month trading, so we were a little big aggressive toward the bear side in some trades, and continued to take off a lot of trades this month that more than covered this trade.

I know this is going to be a loser, for sure, we've been banking on a loser here on this one. There's nothing we can do on these debit spread trades. But this was meant to be a hedge for our portfolio the entire time. So that's how I see it, and that's how we're going to o through with it for the next month.

I still like VXX, to the downside as another hedge for next month. We'll consider adding another position to VXX if we get a little pop higher here in the next couple of weeks. The first trade that we close out of today is our IBB Iron Condor, took in about 142 dollar profit on this one, basically an automatic closing order of about 59 dollars.

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Our closing order was set at about sixty dollars; we just got filled at about a penny better than that. But nothing here too major, with IBB, and PLD Well totally has come down dramatically since we entered this trade just a couple of days ago. So we haven't been in this trade too long, but notice how quickly that implied volatility has dropped.

Even though the stock has made a pretty decent move, that wasn't enough to counteract the decay and value of options because of implied volatility. For that reason, we were able to get out of the trade with a nice profit in IBB and didn't have too much exposure.

You can see these are still March contracts that have almost 29 days to go. And we've gotten out of them way early. That's just part of the name of the game here, is taking trades off at the opportune time. XHB is another one. This is our straddle trade that we had in XHB, as a reminder with straddles, we always try to collect about a 25 percent profit target, meaning if we sell something for a dollar, we want to take it off at 75 cents.

We're taking 25 percent of the credit received as our profit. In this case, we were able to take about 120 dollars on XHB on just these two contracts. Again, these are Marc contracts, they've got about 30 days to go, still left, but we saw a nice decay in XHB and basically the stock, even though it had a little bit of movement over the last couple days and some people in the membership, you know who you are, kind of maybe peed your pants a little bit with a little bit of movement here.

You've just got to be patient with a lot of these trades because sometimes they're going to move against you early. That's basically what happened with this particular trade. We entered it back here when implied volatility was high but not insanely high, and then all of a suddenly implied volatility ... or the stock dropped, and it dropped a couple of dollars, kind of outside of our break even point.

Implied volatility popped back up for a little bit, and then it came back in an implied volatility came down. This is a great example of just being patient with your trades. You have to keep your position size small enough to be able to handle and manage trades that go against you like this, because in the end, as long as you keep those high probability trades on, you're going to make money in this business.

You just have to keep the lights on, meaning you've got to keep enough capital in your account to keep making trades. XHB was a good little trade for us as well. The trade that we entered today, a new trade is another strangle, and that is in JDX. Now, most of the gold stocks were pretty quiet today, until the end of the day.

Probably until the last hour of trading. It seems like they just took off like everyone was going gang busters into gold. In this case, for JDX, this is an additional trade to our current strangle that we already have, and we mentioned that in the notes and the trade comments.

What we're doing is just stacking or layering on another strangle in JDX at the same probability of profit that we had for our original position. Like many of you know, what I like to do is instead of entering, let's say, ten contracts at one time, I like to spread my entry out over many, many days.

Or even a week or so, so I'll enter three contracts here and then two here and then three more here and kind of average into the position. So in this case with JDX, we did that today, we sold the 22 calls, the 16 puts, with implied volatility in the 82nd percentile you have to be a little more aggressive here.

This is when we have our opportunity to take advantage of kind of the biggest spread or edge in implied volatility. Again with JDX, selling these options where we did, we're taking a huge profit window here on this ETF. So the 16 puts are there, the 22 calls are all the way up here, so basically, this stock can trade anywhere in this massive window and range between now and expiration, and we make money.

There's not too much that you can do right now that gives you this risk profile. Again, it's because implied volatility is so high right now in gold. I mean, look, we haven't traded gold in practically all year, I don't even think we've traded gold in the last 9 to 12 months.

But now this is what the market gives us. Gold is real, really high in [inaudible 00:06:07] the option premiums are fantastic, and that's what we need to do. When we look at the trading grid, we can see the positions that we have in there, and remember that we already have the 14 and a half puts and we already have the 21 calls.

Again, all we are doing now is because the stock is a little bit higher, it's at 18 and a half or so, 18 and a half, 19, what we're doing is just resetting the probability. We're targeting something around the 15 percent probability of being in the money on both ends.

That's what we did today. We re-targeted the 16 puts and the 22 calls, and you notice, that kind of moves our average up a little bit higher in our entire position. Now our combined position in GDX looks like this, right? We've got still a huge potential range here for GDX to trade.

All the way down to 14 and a half still, and up to around 22 on the top side. Even though the stock has been crazy, stocks trading right in the middle of our range right now. We've got a couple of hundred dollars or premium right here on GDX, so it's going to become a nice position for us.

Again, it's all because implied volatility is high. I just can not stress that enough. As always, hope you guys enjoy these videos, if you have any comments or questions, please ask them right below inside of the comment box on this page. That way everyone can take a look at it, and I can respond at one time.

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.