{"id":20635,"date":"2023-02-24T07:30:08","date_gmt":"2023-02-24T12:30:08","guid":{"rendered":"https:\/\/www.jeffclarktrader.com\/?p=20635"},"modified":"2023-02-24T07:30:08","modified_gmt":"2023-02-24T12:30:08","slug":"how-to-profit-proof-your-options-trades","status":"publish","type":"post","link":"https:\/\/jeffclarktrader.com\/market-minute\/how-to-profit-proof-your-options-trades\/","title":{"rendered":"How to Profit-Proof Your Options Trades"},"content":{"rendered":"

People tend to think being successful in options is all about swinging for the fences and trying to make a killing on one big trade.<\/p>\n

I fell victim to that mentality when I was 19 years old… and it cost me my life savings.<\/p>\n

From that day forward, I realized that having a long and successful career as an options trader requires focusing on risk management and consistently taking profits – even if they’re small.<\/p>\n

Quite frankly, you’re going to be wrong a lot of the time when you trade options.<\/p>\n

A stock can go up, go down, or go nowhere.<\/p>\n

So, you need to look for ways to turn your position into a profit… even if you’re wrong.<\/p>\n

That focus is the basis of the strategy I use with my own money… And today, I’m going to show you how to begin using it yourself.<\/p>\n

Always Start With This Question<\/h2>\n

I’m going to show you how this works with a real trade my readers took advantage of…<\/p>\n

At the time, I liked the idea of owning Seabridge Gold (SA), a Canadian gold explorer. SA was dirt cheap, and I thought it would be trading much higher a few months down the road.<\/p>\n

So, I recommended buying the Seabridge January 31 $15 call options for about $1.65. That call gave us the right to buy SA at $15 a share. We spent $1.65 on it.<\/p>\n

To be profitable on this trade, we needed SA to trade above $16.65 on option expiration day on January 31. That was 25% above the price at the time.<\/p>\n

If SA fell in price, we would have lost money.<\/p>\n

We would have also lost money if SA went nowhere. The only way we were guaranteed a profit on this trade was if the stock rallied more than 25% by January 31.<\/p>\n

That may seem like a tall order. But I was confident the trade would work out and I was comfortable making the recommendation.<\/p>\n

However, I still had to ask myself, “How can we make money on this trade, even if I’m wrong?”<\/em><\/p>\n

That’s where this next strategy comes in…<\/p>\n

How to Place a “Spread Trade”<\/h2>\n

As long as we were spending money out of our pocket to make this option trade, the odds were against us.<\/p>\n

But there was a way to put some money back into our pocket… without taking on any extra risk.<\/p>\n

The easiest way to do this was to create a “spread trade.” Spreads involve buying one option and then selling another.<\/p>\n

Since we owned the Seabridge January 31 $15 call options, we had the right to buy the stock at $15. To create a spread, we sold someone else the right to buy Seabridge from us at a higher price.<\/p>\n

My initial upside target for this stock was around $20 per share. So, we sold the Seabridge January 31 $20 call options, which gave someone else the right to buy the stock from us at $20.<\/p>\n

We collected $0.85 for selling the call. By doing this, we recouped more than half the cost of the January $15 calls.<\/p>\n

Here’s how that looked, trading one contract at a time. (One option contract covers 100 shares.)<\/p>\n

\n\n\n\n\n\n
Action<\/th>\nOption<\/strong><\/th>\nDefinition<\/strong><\/th>\nTotal<\/strong><\/th>\n<\/tr>\n
Buy, to open<\/td>\nSeabridge Jan. 31 $15 calls<\/td>\nRight to buy
Seabridge at $15<\/td>\n		Spend $165<\/td>\n<\/tr>\n
Sell, to open<\/td>\nSeabridge Jan. 31 $20 calls<\/td>\nObligation to sell
Seabridge at $20<\/td>\n		Collect $85<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n

Total net cost: $80<\/strong><\/p>\n

Per contract, we paid $165 for the right to buy SA at $15 per share. And we received $85 for taking on the obligation to sell SA at $20 per share. We spent $80 for each spread.<\/p>\n

That means we immediately lowered our out-of-pocket cost for this trade from $165 to just $80. Our maximum loss fell more than 50%.<\/p>\n

We also reduced our maximum profit. Since we sold someone else the right to buy SA from us at $20, we wouldn’t have made any additional profit if the stock rallied above that level.<\/p>\n

But because $20 per share was my initial target for this trade, we would have locked in profits at that price anyway. We were just agreeing to do so ahead of time.<\/p>\n

Reducing Cost Is the First Step<\/h2>\n

Now, think about this…<\/p>\n

If SA closed at $20 per share on option expiration day, the Seabridge January $15 call options would have been worth $500 per contract.<\/p>\n

We spent $165 on the original trade. So we would’ve had a $335 profit, or 203% gains on our initial $165 investment.<\/p>\n

But by creating the spread, we reduced the cost of the trade to just $80. And the spread would still have been worth $500.<\/p>\n

By adding the second leg for the spread trade, we would have had a $420 gain. That’s 525% on the original investment.<\/p>\n

The spread position lowered the cost of the trade, so it also lowered our risk and increased our potential percentage profit if the stock reached my target price.<\/p>\n

This was a BIG improvement over just buying the January $15 call options outright.<\/p>\n

But even with this spread trade, we still would’ve only profited if the stock moved higher. We would have lost money if SA fell or went nowhere.<\/p>\n

To increase our chances for a profit, there was one more thing we needed to do…<\/p>\n\n\n\n
\n

Free Trading Resources<\/strong><\/p>\n

Have you checked out Jeff’s free trading resources on his website? It contains a selection of special reports, training videos, and a full trading glossary to help kickstart your trading career \u2013 at zero cost to you. Just click here<\/a> to check it out.<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

How to Make a “Good” Trade Great<\/h2>\n

There was an easy way to make this trade even better. We needed to add one more leg to this option position…<\/p>\n

We sold an uncovered put.<\/p>\n

By selling uncovered puts, you get paid to agree to buy a stock at a specified price by some date in the future. It’s that simple.<\/p>\n

Selling uncovered puts is my favorite options strategy. In my experience, it’s the most consistent way to profit in the options market.<\/p>\n

Now, it’s important to only sell uncovered put options on stocks you want to own anyway… and at prices at which you’d like to own them. In a rapidly falling stock market, you may end up having to buy the stocks on which you’ve sold puts.<\/p>\n

But SA was a dirt-cheap gold stock I wouldn’t have minded buying back then… when it was trading for $12.50 per share.<\/p>\n

So, I recommended selling the Seabridge January 31 $10 put options. That obligated us to buy SA at $10 per share if it closed below that level on option expiration day January 31.<\/p>\n

At the time, the puts were trading for $1.10. That covered the $0.80 cost of our spread trade and put an extra $0.30 per share in our pocket.<\/p>\n

Here’s how that looked, trading one contract at a time. (One option contract covers 100 shares.)<\/p>\n

\n\n\n\n\n\n\n
Action<\/th>\nOption<\/strong><\/th>\nDefinition<\/strong><\/th>\nTotal<\/strong><\/th>\n<\/tr>\n
Buy, to open<\/td>\nSeabridge Jan. 31 $15 calls<\/td>\nRight to buy
Seabridge at $15<\/td>\n		Spend $165<\/td>\n<\/tr>\n
Sell, to open<\/td>\nSeabridge Jan. 31 $20 calls<\/td>\nObligation to sell
Seabridge at $20<\/td>\n		Collect $85<\/td>\n<\/tr>\n
Sell, to open<\/td>\nSeabridge Jan. 31 $10 puts<\/td>\nObligation to buy

\n Seabridge at $10<\/td>\n		Collect $110<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n

Total net credit: $30<\/strong><\/p>\n

We created a trade that paid us $30 to set it up. That $30 was ours to keep no matter what happened to SA.<\/p>\n

This trade could have played out in one of four ways…<\/p>\n

    \n
  1. \n

    Seabridge closed below $10 on January expiration day.<\/strong> We would’ve been obligated to buy SA at $10 per share. Counting the $30 we received for setting up the trade, we agreed to spend $970 on 100 shares, or $9.70 per share. So, this trade would have been profitable as long as SA held above $9.70 per share.<\/p>\n<\/li>\n

  2. \n

    Seabridge closed between $10 and $15 per share on January expiration day.<\/strong> All the options in the combination would’ve expired worthless, and we would have kept the $30 per contract.<\/p>\n<\/li>\n

  3. \n

    Seabridge closed between $15 and $20 per share.<\/strong> The higher SA traded in that range, the more money we would’ve made. For every $1 SA rallied, we would’ve collected another $100 per contract.<\/p>\n<\/li>\n

  4. \n

    Seabridge closed above $20 per share.<\/strong> The trade would have been worth $500. So, our maximum profit would’ve been $530 ($500 for the combination, plus $30 for the original setup of the trade).<\/p>\n<\/li>\n<\/ol>\n

    In other words, the only way we could have lost money on this option combination was if Seabridge dropped another 25% from its already-depressed stock price.<\/p>\n

    We were going to make money in every other scenario.<\/p>\n

    The Strategic “Third Leg”<\/h2>\n

    After my initial recommendation, SA shares had bounced all over the place, trading between $13 and $17.<\/p>\n

    But because we set up such a large “margin of error,” we didn’t need to worry about the day-to-day fluctuations. We could concentrate on the longer-term objective – a higher share price going into January.<\/p>\n

    Only a few months after my recommendation, SA traded for about $18. I figured for such a short time frame, that was close enough to my original target.<\/p>\n

    So, we closed the trade for a $250 net credit per contract. Counting the $30 we received for setting up the trade, we had a total gain of $280 per contract.<\/p>\n

    The “spread” I showed you earlier was a good trade.<\/p>\n

    But by adding a third leg to it, we created a GREAT trade. And it worked out perfectly.<\/p>\n

    Best regards and good trading,<\/p>\n\n\n
    \"signature\"<\/td>\n<\/tr>\n<\/table>\n

    Jeff Clark<\/p>\n

    P.S.<\/strong> If you’re curious about using this strategy on your next trade, you can check out my options trading advisory, The Delta Report<\/em><\/a>.<\/p>\n

    My recommendations touch dozens of different sectors and show you how to use uncovered put options to maximize your profits – all with reduced risk.<\/p>\n

    Just click here<\/a> to learn more.<\/p>\n

    <\/p>\n

    Reader Mailbag<\/strong><\/h2>\n

    In today’s mailbag, a Jeff Clark Alliance<\/em><\/a> member comments on Jeff’s insights…<\/p>\n

    \n

    Hi Jeff, I truly enjoy your market insights and forecasts each morning and afternoon. Thank you for all your attention and educational efforts.<\/p>\n

    – Jeffrey S.<\/strong><\/p>\n<\/blockquote>\n

    Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at feedback@jeffclarktrader.com<\/a>.<\/p>\n

    <\/p>\n","protected":false},"excerpt":{"rendered":"

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