3 Great Case Studies On Option Trade Duration

Download The "Ultimate" Options Strategy Guide


Option trade duration: Tonight, we’re going to go over all of the trades that we made on Thursday, November 20th. And we’re right up against expiration here, so just trying to close out profitable losers, scratch trades, whatever it is right before expiration. Make sure what positions you have for November expiration, so you can close them out appropriately or let them expire or whatever you need to do.

I’m pretty excited about this video tonight not only because I think we had some good trades we closed out of, but it really, really proves the point in this video why sometimes with risk defined trades, so these are trades like iron condors and debit spreads and credit spreads and butterflies, why with risk defined trades sometimes you have to be diligent enough to wait until the market comes back into a range that allows you to take money off the table.

And tonight with Goldman Sachs and LMT and XLE for that matter, it is the case studies on why you need to wait, and sometimes wait up until the day of or the day before expiration like we did before we’re able to take these trades off. Let’s go over those and let’s get right into it here.

Related "Option Trade Duration" Resources:

option trade duration

The first one that we’re going to talk about is Goldman Sachs. Our original trade in Goldman Sachs was the 190/195, 160/155 iron condor. We had the one 190/195 call spread; the 160/155 put spread. We initially had put that on. And as Goldman Sachs was rallying higher, we just last week decided to add a hedge to that trade. I’ve separated them out, but these two trades went together, and we added put spread as Goldman Sachs was rallying higher a couple of weeks ago.

We added put spread at 190/185 to take in more credit. Now before we get to the charts, after all, adjustments and everything that we did, we ended up taking a $30 loss on this trade overall which is a scratch trade for us. A $30 trades here or there is not going to break the bank either way and not going to make us a lot of money. But the whole idea of what I want to show you guys is that for most of the month, Goldman Sachs was a losing trade up until about two days, the last two days of expiration.

Here's the chart of where Goldman is. And mind you, we entered this trade back when Goldman Sachs was down in this range. You can say that it pretty much went completely against us. Our short strike at 190 was right here on the call side. It went completely against us the entire month. From day one, it started moving against us, and we didn't have any time decay in there to let the premium dry up in Goldman Sachs.

And basically for the middle part of the month and as we got closer to expiration, Goldman stayed up here in this range above 190. This is an area where we lose money. That’s where we don't want it to stay. But this is what I’m trying to prove to you guys, is that you sometimes have to be diligent enough to hold through a paper loss like that because at this point up here, we’re making no money, in fact, we’re losing a bunch of money.

But it’s all paper losses, and at some point, the market is going to be cyclical and come back around. And we're fortunate enough in this case that it came back around before expiration, we didn’t have to roll to the next month or whatever the case is. But you'll notice that just in the last couple of days, it finally dipped under that 190 and that allowed us to then take some money off the table.

Now, we did obviously add a hedge which ended up being a good idea just for protection; it was a nice little hedge that we added. But we covered the trade a scratch, an excellent case study on why you got to hold through a loss like that, very, very interesting.

Start The FREE Course on “Portfolio Management” Today: When I say "portfolio risk management" some people automatically assume you need a Masters from MIT to understand the concept and strategies - that is NOT the case. But you do need to use simple checks and balances. Click here to view all 16 lessons ?

As we go to the next one which is LMT or Lockheed Martin, we had the same setup in Lockheed Martin. We originally sold the iron condor, so this was the iron condor that we originally had, the 185/190 call, the 160/155 puts in Lockheed Martin. The same thing happened. Lockheed moved completely against us, and in fact, moved well beyond 185 which was our short strike on the topside, so we went ahead and added that put spread below the market to take in a little bit more credit.

Hopefully, it didn't go too much beyond that. After all adjustments and everything, we closed out the trade with a $1 profit which is pretty much as close to a scratch as you can get, but it was a $1 profit nonetheless, less than that after commissions obviously. We go to Lockheed Martin, and you can see the same thing happened. The stock made a huge move against us. We got in around here right after earnings. There was basically an earnings trade that we made in Lockheed.

And right afterward, it moved completely against us. Now remember, our short strike is at 185 which is right here. That’s our short strike right there. That means that for the better part of the entire expiration month, Lockheed Martin stayed above that range and was a paper loss the whole time. We kept our position small enough so that we could withstand that, and we’re diligent enough to maintain the trade open whereas most traders they would hit a stop loss.

If you had a stop loss here, you would’ve absolutely been hit out at the stop loss and guaranteed a loss, but since this is a risk defined trade, meaning that you know exactly how much you’re going to lose, how much you’re going to win, we’ve got to let the probabilities work themselves out. In this case, we only got an opportunity to close out this trade the last two days here. And today, we were able just to get the orders filled to get out of this trade, but it finally came back down somewhere around 185.

And you can see today it closed a little over $185, so the hedge that we added just gave us enough of a bump in our breakeven prices and enough of credit to get rid of this trade overall with basically a scratch or a $1 profit. But an interesting case study on why you’ve got to continue to hold these things all the way through expiration even if they’re paper losers because you just don’t know when the markets were going to completely turn around.

The next one that we got out of today was a nice little profit in XLE. This one was really interesting because most of the money that we made in XLE, even though we’ve held this trade for quite a while, a couple of weeks, maybe 3 or 4 weeks, the vast majority of this 228 profit that we made closing out this iron condor in XLE came in last day. And it did come in the last day where just implied volatility took over and time decay took over and started to hammer down the value of these options.

I think it’s just interesting because looking back on it, who knows if we could’ve just waited until a couple of days before expiration, sold an iron condor there and seen virtually the same type of profit. I’m personally going to be doing some paper trading and testing on that to see how that works out over the next couple of months. But we did make most of the money in XLE just on the last day which is pretty incredible.

We held the position for a long time, didn’t make a lot of money, but finally made some money in the last couple of days. We had initially entered separate orders that we turned into an iron condor. We originally had the put spread, and then the call spread that we added later. At the end of the day, though, the range that we needed XLE to trade in was about 88 to 86, so not a big range at all, about a $2 range. And you can see that on the charts here that it traded outside of that range a lot.

We needed XLE to be between this range here at 86 and right up here between 88. That was a very tight range for this condor that we had, and we knew that going into it because it was just a lot of premium that we took in. But you can just like Lockheed Martin, and just like Goldman Sachs, it spent the vast majority of the month trading outside of that range in an area that was going to guarantee a loss on this trade.

But you just have to be diligent enough to wait and let it come back into that range and start to decay in value with those options. And today, we were able to take some money off the table, and we did so even though we probably could’ve left it on for another $100 tomorrow, but I just didn’t know if maybe XLE was going to rally higher and go above 88 because I don’t want to risk making another $100 to possibly lose everything that we already had. It’s the smarter trade to go ahead and take that position off and just exit it.

And then the last two trades that we exited real quick are… I'd put them in the hedge category because we have other sides that are going to expire worthless. And that’s our P and KO which is Coca-Cola. These are trades that we rolled earnings into a butterfly, and we’re just exiting the side of the trade that’s in the money right now before expiration.

Both of these, we bought back for near max loss, KO, we bought back for a max loss, but we have the other side here that will expire and give us some money, so we’ll round out these and put the totals in the closing column after we get through expiration here. As always, I hope you guys enjoy these videos. If you have any comments or questions, please ask them right below in the video. I’ll make sure I’ll get back to all of those tonight or tomorrow before the open.

And if you're watching this video somewhere on YouTube or anywhere else online out there, you just have to understand that you're getting this video about 15 days after it comes out to our members. If you want these alerts and this video that accompanies those alerts every single night talking about the trades that we made, you’ve got to sign up for a free trial at optionalpha.com. 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.