Lesson Overview

81% With SPY Short Strangle

It's hard to sell naked options with the VIX north of 35 but that's where the money is made. In today's case study, I'll show you how our SPY short strangle collected 81% of the initial premium only after we adjusted the position closer to the market. We started with a wide strangle and once the market moved down we roll down our call closer to the market for an even higher credit. This helped give us more than $16 of room for SPY to move and still make money which was incredible. So, let's get right into it!

Show Video Transcript +

In tonight's video, I want to go over a cool closing trade that we had in SPY. In particular, kind of use this as our case study here tonight because this adjustment that we made in SPY during all of the market craziness and high implied volatility.

Allowed us to take about 81% of our initial credit off of the table way early in expiration for this SPY strangle that we now closed out of.

And so again, I think it's a cool case study because it looks at not only just adjusting trades that are going be nice, big, winning trades, or protecting trades that are going to be losers.

But also adjusting in trades that actually could give you the opportunity to make some more money when the market is favorable. So that's the first one we're going to over tonight, is our SPY strangle.

So we ended up closing out our SPY strangle today at the 190 call, I'm sorry, the 195 call and the 190 put. The market was trading kind of in between that range.

We bought it back for a $570 debit and netted after adjustments and rolls and closes, and things like that, of about $290 of profit. So a nice pretty big profit on one lot strangles in SPY.

So here's the setup. And again, this is all real trades. This is live trades. They're all fills here in my account, not paper trading, any of this stuff. This is real money that we put to work here.

And you can see our initial strategy; our initial strangle, was done on 8/21 right here when the market was just going crazy. And we sold the 212 call above the market. And then we sold the 190 put on the market.

And we took in a credit of about $355. Okay? So that was our original trade, the 212 call and the 190 put on the market. So here is 8/21, right? This is this day right here when the market was almost at the craziest point that it was at.

So that was the day when the market was falling. We sold the 212 call, which is up here. That's where our call strike was. And we sold the 190 put, which was down here. Okay? So you can see.

And we're doing this 30 days out, or 60 days out from that point. And again, expiration's all the way out here in October. All right? So this is the setup that we had initially.

Now, what happened is that we went back in a couple of days later because the market had gotten crazy, and we made an adjustment to that position where we went back in on the 24th, and we rolled down ...

You can see one closing, one opening order ... We rolled down our 212 calls to 195. Now, this is the adjustment that we made to bring the side that the market was moving away from much, much closer to where the stock is trading at.

And because implied volatility had skyrocketed, we had a huge opportunity to take in an even bigger credit just on this one side that had rolled down. So now, by closing out the 212 call, we bought that back for just a cheap $32.

We resold the 195 call and took in a nice big credit of about $537. So overall, kind of the net-net, is we took in an additional $505 on our total credit. So we're looking at about $860 or so that we've got working in our piggy bank.

That's what we're working with, is about $860. So again, just so you guys can visually see this, our original position, we sold the 190 puts, we sold the 212 calls which are about here.

Two days later after the market made a little bit of a move down, we came back and moved this side a little bit closer all the way down to about the 195. So we came close. But remember, these are just our short strikes.

So our short strikes were close at 190 and 195, but we had an $8 premium. So we could move out $8 on either end of that because our break-even point was going to be $8 further out. Okay?

So, key point to remember there. Even though our short strikes were close ... Remember our call was right here and our put was right here ... That credit that we took in of $8 overall moves our break-even points out even further.

So the strategy is centered around this point. But our break-even points are a little bit further than that. And then obviously we just had to wait from there. So you can see we did absolutely nothing and just let implied volatility in the market kind of run its course.

And between the time that we entered those trades and now, implied volatility has been cut by more than half. And you can see that the market is more or less moved sideways and gave us an opportunity to take money off the table today.

So now we go back into our trade tab here. You can see we went ahead today and bought this back for $570 debit. This is 9/23, that's when we're doing this video. And now that gives us that big nice premium that we took in of $290 as a net between everything after adjustments.

So again, cool case study because ... Look, here's the thing. This proves a point again and again that we're trying to show you guys, that you make your money when implied volatility is highest.

You have to be aggressive, and sometimes that's hard. Believe me, selling two naked options on the market on SPY when stocks were going crazy, and everyone was talking about a huge correction, that's hard to do.

But as you can see, you get compensated for that additional risk that you took on. We didn't do this in a crazy size. We didn't go out and sell 100 of these strangles in SPY.

We just did it in a manageable size and just allowed ourselves an opportunity to take some money off the table and profit from implied volatility. Okay?

So we had another closing trade today. We got out of our BABA vertical call credit spread, had sold the 65/70 spread above the market. Looking for BABA to continue to move down. This was just a basic market hedge lower.

And you can see the stock just has continued to move down and down and down. Implied volatility's basically been about the same generally speaking in BABA. But we had an opportunity to take it off at about a 50% of the credit that we had received initially.

So that working order that we had automatically just closes us out and gets us out of the trade. The other trade that we did enter today is we kind of replaced BABA and some of these other directionally bearish trades with a new one in OIH. So oil inventory reports came out today.

It looks like there's a jump in inventories. That doesn't mean good news for a lot of oil stock, so we're directionally playing oil lower. We are selling the OIH October 30/31 credit call spread for 30 cents, and we're doing five of those just because it is a $1 wide spread.

Now again, the whole idea here with oil is that we want to take advantage of not only the directional move down possibly in the market but the higher implied volatility that we see. So here's OIH.

You see implied volatility wall, it's not as high as it was a couple of weeks ago, and we took advantage of that in some other areas, USO and XOP, etc. We still have high implied volatility. It's in the 66th percentile. So it still works, right?

And again, we want to play this just a little bit directionally bearish. So, here's the key though with this trade ... And this is why we did five of these contracts because our short strike at 30 right here has about a 28% chance of being in the money.

And as you know, and any of you who are members for a long time or if you're new and just signed up this week, we want to take in a credit that's equal to the probability of being in the money times the width of our strikes. Okay?

So the probability of this trade being in the money or losing is 28%. So that means that if our strikes are just $1 wide, we want to take in credit that's at least $28. And you can see that we took in credit that's much more than that.

So we took in a credit of 30 cents. So that helps us out in option pricing. This is very fair and favorable pricing. I see probably a lot of people from our membership got into this trade today, which is really good. Okay?

So that's why we did this trade again, just replacing some of the other trades that we've taken off as the markets continue to move down. I think later on this week we'll try to get into a couple more bullish positions specifically.

I don't want to be too jumpy here because the market still doesn't look too healthy as far as making a huge move higher, but we do need to add a couple more bullish positions just to give ourselves a little bit more balance heading towards the end of the week and next week.

So, as always, I hope you guys enjoyed these videos. If you have any comments or questions, please let me know. Add it in the comment section right below this video. And until next time, happy trading.

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