Okay, so I know not everyone is made of money and we can’t all expect to have our option trading businesses funded with an unlimited potential. That elusive dollar can be a bit frustrating to come by in a bearish economy, so I went ahead and compiled some great trades you can place today on any asset you want with healthy profit potential, controlled risk and high probability of success. Sound too good to be true? Read on and I’ll give you some details.
1.Bull Put Spread. The SPY has been on a run for a couple of months now, so why not take advantage of it? But instead of buying a naked call which is more than likely going to expire worthless, try placing a put spread on the SPY by selling a put at 113 and buying a put at 112. This places your initial credit for the premium at 21 dollars and your total potential risk at 79 dollars, with a 70 percent chance of success.
The great thing about this strategy is that if the SPY continues to rise, you make money, and if the SPY stays where it is, you also make money. You come out on top of the trade 2 out of 3 possible price outcomes, so the probability is favorable and the risk is very well defined. If you really like this trade, you can even place 5 or 10 contracts down, multiplying your results and giving you a healthier profit.
2. Iron Condors. I love Iron Condors because they are a neutral spread with a clearly defined and controlled risk. You don’t have to deal with multiple expiration months and can profit from a lack of movement, which is the most common pattern to be observed in the markets. An iron condor is really like playing a double vertical, where you sell a vertical on both sides of an underlying.
If the underlying goes into the strike price for either vertical, you lose money. So in order to pick out a good Iron Condor, you need to find a stock that has been range bound for a while and isn’t trending or showing any signs of an imposing breakout. Look for a stock with a relatively middle of the road RSI and at least a month of range bound patterns.
I recently placed a promising Iron Condor on the SPY’s with my put spread at 112 and 111 and my call spread at 117 and 118. That means that if it goes above 117 or below 112 at expiration, I lose money. I sold 5 contracts so that leaves me with a $165 credit upfront with a maximum possible loss of $335 less commissions and a 56% chance of realizing a profit on the premium. Not a bad position for $335 worth of buying power.
3. Calendar Spreads. Calendar spreads are probably one of the most brilliantly simple trades you can put into your portfolio. The goal of a calendar spread is the same as an iron condor, but with a bit of a different approach. Instead of buying two separate verticals, you buy a LEAP and sell a front month call. Assuming the front month call expires worthless, which most options actually do, you are going to turn a profit when you go to sell your LEAP option since it has decayed in value less than the front month option, which is now worthless.
The risk is if the underlying moves in any extreme direction, whether it be up or down, because both of your options will lose intrinsic value, and you will not be able to sell your LEAP to close the position with any semblance of a profit.
You can place a call on the SPY with a strike price of 112 for 138 dollars with the LEAP reaching out to February. Remember, the goal is to hold onto your February call after the January call is expired, then turn around and sell it for a healthy profit and roll out another call.
For more options trading tips like this, be sure to check out http://www.tamingthemarkets.com
-Eric Conklin
Blogger and Trader
http://www.tamingthemarkets.com