Why Patience Is Important When Trading Options

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Trading options: In tonight's video, we're going to go over all the trades that we made for Wednesday, October 7th. We had just a couple closing trades today and then one adjusting trade. First closing trades, we closed out of our position that we had in US Steel, our straddle.

Bought back the $12.50 put and call for a $116 debit, so a $64 profit. I think the name of the game here with US Steel is that it took a little bit of patience for this thing to turn around. When we originally entered this trade back over here at the beginning of the expiration cycle, we immediately were faced with this trade that went against us. 

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Again, you have to believe in the probabilities, you have to believe in the fact that implied volatility is going to go down, which it did. This thing just took a little bit of time to come back around. Now you can see it landed right in between exactly where we wanted to be.

Right over our sort strikes and with 10 days to go, there's no sense in risking a trade that might go, opposite direction. There's very low likelihood that it trades exactly sideways from here. The best move again is just to take money off the table, use your automatic working orders to get yourself out of the position.

The other trade that we got out of today is we bought back two of our interior straddles in FXE. We originally have two iron butterflies working in FXE. One centered around the $110 strikes and then the other one centered around the $115 strikes. It gave us kind of an average midpoint of around $112.50 or so, and so what we want to do is buy back both of those interior straddles.

We're going to leave on our long options that we have as part of the iron butterfly because they're not worth a lot of money so they kind of act as a little bit of a lottery ticket, just in case something crazy happens in FXE over the next couple days.

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That leaves us with an overall profit of about $145 after all the adjustments that we've made to these positions. Here's a look at FXE right now. You can see, generally speaking, the stock has pretty much moved sideways since we've started entering these trades.

That's helped but what's helped even more is that implied volatility over the last month and a half has gone from the 85th percentile down to the 34th. Implied volatility has gotten crushed as the stock has moved sideways and again, that's helped us out.

More so than just implied volatility, the fact that we had the opportunity to enter an iron butterfly around $10 and then one around $115, gave us this huge potential profit range in here for the stock to land. Even though it ended on the lower end of that spectrum, it still gave us that opportunity to make some money because of we can spread out trades out over a couple of different periods.

The last trade that we want to talk about tonight is our adjustment in FXI. We have another FXI position very similar to FXE. For some reason today FXI and China, whether it was good news that came out in the markets or manufacturing data, caused the market for this ETF to jump dramatically.

What we want to do is we want to roll up now our puts that we have, our naked puts from $33 up to $38. In this case, we're closing out of completely the $33's; we are re-entering and establishing a new naked put position at $38. The difference between buying and selling those is an additional $45 credit.

What that credit's going to do for FXI is give us a little bit more balance and also reduces risk. You can see this is where FXI is; it's been on a little bit of an upward trend here. I think it might pull back before expiration for sure. All we did with our puts in FXI, let me get this position up.

We rolled up; we can see our $33 puts which were worth nothing. We bought those back for a couple of pennies, worth $3. Rolled those up to the $38 strike which is worth a lot more money, those are worth $53. We're exchanging something that's cheap, that we can buy back, that has no more value left to decay out of it, for something that's worth a little bit more money and a little bit closer to the market.

Notice, we didn't go close to where the market is. We can still roll up; we've got some $37 puts that we can roll up if we need to and continue to hedge ourselves if FXI does continue to move higher. Right now, this is our strangle that we're working within FXI.

Even though the stock has made a huge move higher, our break even point on this thing is still around $39, so we've got some room here to let it run up just a little bit more but also to give it a little bit of distance in case it does pull back in the next 10 days before expiration.

That's what we want. We want to give ourselves an opportunity to make an adjustment that gives us less risk, a little bit more balance and centered strategy over the market, but also still leaves us an opportunity to make some money in case this thing does pull back between now and expiration.

As always, hope you guys enjoy these videos. If you have comments or questions, please let me know. Ask them right below here in the comments section 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.