Easy, High Probability IRA Option Trade Example

Download The "Ultimate" Options Strategy Guide

Option trade: In tonight's video, we're going to go over just the two quick orders that we had for Wednesday, December 30th. The first one that we got into really quick after the market opened was our XOP credit spread. We've traded XOP some times over the last month and a half, and it's been well.

In fact, everything that we've pretty much traded in oil has been pretty good since implied volatility is high and the oil markets are low. It ends up working out well for options traders. In this case, we're directionally playing a bearish call credit spread. 

Related "KEYWORD" Resources:

option trade

What we're doing here is we're going out to the February expiration, the monthly contracts as always, and selling the 33 calls and buying the 35 calls. You'll notice a $2 wide strike here. Again, a little bit wider, doing a little newer contracts just because it tends to carry a lot smaller margin requirement.

This is also a great trade if you have a smaller account or an IRA account. It's risk defined. You can do it on any account. You just want to make sure that you want to adjust your quantity down or up based on your portfolio size to make sure that you're maximizing the trade potential, but also keeping your trade size small.

Start The FREE Course on "Options Expiration” Today: Whether you are a completely new trader or an experienced trader, you'll still need to master the basics. The goal of this section is to help lay the groundwork for your education with some simple, yet important lessons surrounding options. Click here to view all 12 lessons ?

At the trade entry time today, we have a 75% probability of profit. Implied volatility on this stock was around the 53rd percentile. Nice implied volatility, high, not incredibly high. That's why we're doing the credit spread versus doing like a strangle or a straddle where we're just pure selling options.

We're just trying to play a little bit here and see if we can't get maybe a continued move down in XOP, which ended up happening after we opened the trade today. That worked out in our favor just a little bit. Then, possibly just a continued move down in implied volatility over the next month and a half.

You can see that is a chart here of XOP. Strike price wise, again, what we did is sold the 33 strikes, bought the 35 strikes, which are $2 away. You can see that the probability of the 33 strikes being in the money at expiration right now, at the end of the day is about 20%.

There's about 80% chance as it stands right now that the trade is a winner at expiration in February. Again, nice high probability trade. We're not overshooting here. We're keeping our position size small, but it's a great trade to make in an IRA or even a smaller account.

The other trade that we took off today was a strangle in BAC. Finally got filled on this strangle to close it out at a net debit of $.48 for each of these contracts. Means that we took a little over $100 in profit on BAC and banked yet another winner for the entire month.

What I like about this trade, in particular, is that we did see the stock actually, see that drop in implied volatility. It happened quick. Right after dividends were announced and paid in BAC, you can see that implied volatility just for about a day or so pop higher, up to around the 80th percentile. That's when we took action on this trade. That's when we sounded the alert to make the trade.

Then, very quickly after it, the implied volatility dropped. In that period when implied volatility dropped, the stock moved from basically 16 1/2 to 18. It had a big move, and therefore we had to wait for the stock to move just a little bit further down and come back inside of our strike range.

In this case, it's a good example of a trade that some times takes a little bit to work out. It takes a little bit longer to process and for the implied volatility to come down, and for the time decay to get sucked out of it. That's why we keep our position sizes small so that we have that opportunity to take these trades off at a ... Every single day we've been taking off some good trades here and banking some nice profits.

The other thing I wanted to go over right now is CMG. I'll tell you this and hopefully, those of you that are listening to this video tonight, this is what I love about option alpha and doing this, and this is why I do this every single night. I take time away from my family and my kid, and come on here and do this video and try to help out as much as I can.

These are just my trades. I'm just trying to help you guys understand what we're doing here. We got a lot of questions here on CMG. What do we do? Do we adjust it? How do we go about it? If anything, what's the game plan here? Without you guys asking these types of questions, I wouldn't know what you guys are interested in learning more about.

I encourage you to continue to ask and ask more questions. Obviously, look for the right answers yourself and see if you can come up with it without having to just blindly ask. Please do not email me every question under the sun, but this is a great example of the power of doing this I think and learning from here.

CMG obviously has had a little bit of a rough road. Everything that's happened with the stock and news about E. Coli breakouts and all that stuff, it's obviously been tough on the stock. The fall in the stock, meaning, the fact that the stock has fallen from about 600 to about 500 happened pretty quick.

From here, it's just been dragging down slowly every day. Today it was down $4, not a huge move down. As a result, implied volatility has jumped. We have the wide iron condor in CMG, so if you look at your risk profile here, this is what we have in CMG as far as an iron condor. We've got the 495 put, and the 490 put credit spread below the market.

Remember, stock right now is trading right here where this dotted line is at 485. In my opinion, it's breached our break even point. You can make an adjustment if you need to. In my opinion, it may be still a little bit early to make that adjustment.

Especially with the holiday coming up, I don't think that there's going to be a huge move in the stock, or a huge continued to move lower in the stock necessarily with the holiday coming up on Friday. I saw we wait at least until next week to do anything with this trade.

If next week, we see that CMG is still down here, then again, what we're going to do is we're going to roll down and move our call side credit spread closer. Remember, this call side credit spread is all the way up here at 620, 625. This thing is deep out of the money and is really in no chance of being in the money at expiration.

It's practically worthless now, so what we would do is close out of that position, and maybe reestablish something a little bit closer to where the stock is trading, and start to take in a little bit of credit to do that. Right now, because implied volatility is high, it's not effecting us as much as if implied volatility dropped.

If implied volatility dropped, we'd see much more of an impact on our P & L. We're losing a little bit of money right now, but because implied volatility has remained high, it's kept the entire value of this spread regardless of where this stock is trading pretty high as well.

For that case, we have an opportunity to maybe hold on to it just a little bit longer and start to maybe make some adjustments next week, see if the stock has a little bit of a rebound. This stock has been known to fall and then rebound, fall and then rebound. We don't know if this next move is another fall and then rebound much, much higher back above our strikes.

I think right now our overall portfolio is pretty good. I am not adjusting CMG until next week. Again, I just went through the process of making that adjustment, so if you want to do that, close out of your call credit spread, and resell a call credit spread closer, taking in an overall credit.

That's going to help reduce the risk on this trade and widen your break even points. As always, I hope you guys enjoy these videos. If you have any comments or questions, please ask them right below in the video comment box.

I want to make sure we get all those comments right here on this page so everyone can see them, and other people can learn from the same types of questions that we get right here at option alpha. 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.