Allow me to be candid. If you have no interest in option trading there is a very high likelihood that you will not enjoy this article. So while I will encourage you to “take a chance” and keep reading, if it “ain’t your cup of tea”, then “class dismissed”. Thanks for stopping by and please check back soon.
If you are into option trading then settle in and get ready to learn a lesson in using the power of options to create a trade with unlimited potential and limited risk – and to then adjust that position to improve the odds of success and to lock in a profit, thereby reducing stress.
(See also Can Junk Bonds Overcome Unfavorable Seasonal Bias?)
Trade #1
The initial trade was found on 6/3 using the “SkewFinder” routine at www.OptionsAnalysis.com and was based on a bullish outlook for silver. The initial trade involved:
*Buying 11 Sep16 SLV 15 calls
*Selling 11 Jan17 SLV 20 calls
(click to enlarge)
Figure 1 – Initial SLV Sep15/Jan20 call spread (Courtesy www.OptionsAnalysis.com)
Adjustment #1
By 6/13 the initial trade had generated an open profit of $506 and shown in Figure 2.
(click to enlarge)
Figure 2 – A decent profit, but still risk of loss (Courtesy www.OptionsAnalysis.com)
At this point the decision was made to adjust the trade in order to eliminate the risk of loss, i.e., to lock in a profit. That trade involved:
*Selling 11 Sep16 SLV 15 calls
*Buying 10 Jan17 SLV 20 calls
*Buying 2 Jan17 18 calls
The particulars and risk curves for this trade appear in Figure 3. Note that the worst case now is a profit of $306.
(click to enlarge)
Figure 3 – SLV trade after 1st adjustment (Courtesy www.OptionsAnalysis.com)
Adjustment #2
After another upleg, SLV reversed to the downside on 7/12. At this point the decision was made to make another adjustment. This adjustment involved:
*Selling 2 Jan17 18 calls
*Buying 2 Jan17 20 calls
*Buying 1 Jan17 15 put
The net effect of this adjustment was to:
*Lock in additional profit
*Retain upside potential
*Create the potential for profit if SLV falls apart
See Figure 4 (click to enlarge)
Figure 4 – Adjusted trade as of 7/12 (Courtesy www.OptionsAnalysis.com)
Summary
When it comes to option trading the bottom line is that there are a lot of ways to play. The more one learns and the more comfortable one becomes the greater the potential for entering into limited risk trades – and adjusting those trades to reduce risk, lock in profit and/or otherwise improves one’s reward-to-risk scenario.
Jay Kaeppel
