Quick Little Option Trade Profits

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Options trading profit: Tonight, we’re going to go over all of the trades that we made on Monday, January 5th. We had a fairly active day closing out some trades, had one little hedge. The markets were active with most of the major indexes down double digits today which was great.

The S&P and the Russell and the Dow and the NASDAQ all down a pretty good clip, so we’re starting to see volatility creep back into the market which is great because not only is that good for trades that we have to enter for this month, but also as we get closer to earnings, that’s just going to really pump up the amount of volatility that’s in a lot of these earnings trades. And we’ll start to enter some new earnings trades starting tomorrow hopefully.

We’ve got a couple of targeted stocks that are on our watch list this week that we’d like to get into. Premium members know this because we’ve already talked about what those stocks are on the strategy call on Sunday night.

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As far as today is concerned, we had two little closing trades that we took profits on. And at this point, small profits always add up, and that’s what we’re trying to do here, is make a lot of trades and close them out for decent benefits. Both of these, we closed out ahead of expiration. EWW was just about two weeks ahead of expiration. We bought back our credit call spread that we had for the 62/64 calls, we bought it back for about a $.6 debit, so we took in $23 on profit for every one of those that we sold.

Same thing with EFA for February. And this one was a little bit further out, so we did close this one well ahead of expiration. But we made $15 on this trade, much more than our 50% max profit target that we usually have, so it's pretty much wasted away as much as it’s going to go all the way between now and expiration. There’s no point in holding the trade just for another $.7 in credit.

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On both of these, you can see this is EWW’s chart here, and we got a good move down in the stock, and that's exactly what we wanted. Now, we did see a bump up in implied volatility just in the last couple of days, and that’s obviously because the stock continues to move down. But even with that bump up in implied volatility, the way that we were able to profit on this trade is because EWW continued to move down and move down from about 60 down to the mid 50.

That was the reason that we were able to bank a nice little profit in that trade. When it comes to EFA, the same thing, we got a bump up in implied volatility, but the stock remained flat and continued to move lower so that obviously helped our position. This is what we’re to do here, is just have positions on both sides of the market, so we can take these little profits as we see them.

Now, both of these trades, we still have a high implied volatility, so they’re going to be candidates for us to enter new trades. We just want to see how far the market is going to go here on a day like today where you have stocks closing much, much lower than where they open and staying low for most of the day. When we look at the S&P, and we see that not only did it open lower, but it remained low. We closed near the lows of the day, so that doesn't show us that there’s any buyer’s coming into the market.

And likewise when we see the market rally robust and close at the top end of the range, close near the highs, that doesn't show us that there are any sellers in the market, so we’re going to be cautiously bearish or bullish or in these times right here and during times like we have right now, we want to be cautiously bearish that we could see continued downward pressure in some of the positions that we have. We’ve got trade setup to take advantage of this. We just need to let them work.

Having said that, we also decided to get into a very wide iron condor in the Qs. The Qs have had magnificent pricing, and we originally had a credit call spread above the market which is doing just fine. It’s far enough out of the money right now that it shouldn’t be any hassle for us in February. But implied volatility remains high, so we figured to leg into something in the Qs by selling a credit spread below the market that's the same width of strikes and the same number of contracts that we have on the call side.

That's exactly what we did. It was just one spread, the 94/92 below the market, taking in an extra $.20 credit. And that just helps increase the premium that we have in the trade, so it increases our potential return, and it also reduces risk because now, we have another credit that can work towards reducing the max loss potential of this trade.

Here's the setup with the Qs and you can see implied volatility remains very, very high in the Qs. The chart is not loading there. Here’s the risk profile chart. This is what it looked like before we made the adjustment. This was our position, the credit call spread above the market, and you can see that our position is doing very well, the Qs are right here about 101.60, so there’s no real risk of going in the money for us at expiration.

What we decided to do was add something right on the edge of this probability range which is about a one standard deviation range. We’re adding the position right on edge at 94, 92. When I throw this on here, you can see what our new iron condor looks like. And the reason that I selected 94 and 92 for strikes was that 94 was far enough away to give us ample distance. Notice we have more than enough room for the market to continue to move lower and still be able to bank a nice little profit on this trade.

That's exactly why I selected the 94 strikes. That just gave us a lot of room, and this does happen to be just outside of the expected range over the next couple of weeks as we get into February expiration. I know this was a quick video, but as always, if you guys have any questions or comments, please add them right below inside the membership area. And as always, 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.