I’m dedicated to helping you make a lot of money. But I’m also a born teacher, and my goal is to help you learn as much as you can about my credit spread strategy and options as a whole.
That said, I want to explain a bit about my trading methodology for this service.
Personally, I like to implement credit spreads that:
- sell at-the-money options
- could give me 50% profit in 4-5 days
- are 2.50-wide
- go for $1-$1.20 premium with $1.50-$1.30 risk
- are based on big-cap stocks with the technical stars aligned
I prefer selling at-the-money (ATM) options, which are options that are roughly in line with the stock’s price. For instance, if Stock XYZ was trading at $50, the 50-strike calls and puts would be considered ATM.
Now, this can get risky — the closer an option is to “the money,” the higher the chances of the stock moving against you. Which means a higher probability of a loss for my spread.
However, I feel like my years of experience as a momentum trader offset that negative probability — I’ve been analyzing charts successfully for years over at Jason Bond Picks.
And while I could go with a safer bet, selling out-of-the-money (OTM) options — which is when the stock is below the call strike or above the put strike — I’d have to sacrifice potential profits on the trade.
50% Profit in Short Order
Per my email and real-time trade notes yesterday, I’m getting back to very disciplined trades in this service, trying to hit 100% wins + winners on every trade.
Meanwhile, I want to play my hands tighter and take small losses on the trades that start to move against me, like Alphabet (GOOG) did yesterday.
However, I’m not always going to shake a stick at 50% winners, especially if I get $1.20 of the 2.50 wide.
Which brings me to …
A 2.50-Wide Spread
What I mean by “2.50-wide” is a difference of $2.50 between my sold option strike and my bought option strike.
So when I say I want to “get $1.20 of the 2.50 wide,” it means I want the premium of my spread — or my maximum potential profit — to be $1.20.
That would mean my maximum risk is $1.30, which is the difference between the strikes (2.50) less the net credit ($1.20).
And since I trade 100 spreads at a time, and each option controls 100 shares of a stock, I’m looking to make $12,000 ($1.20 x 100 x 100) by risking $13,000 ($1.30 x 100 x 100).
If your head is spinning right now, let me give you an example…
Earlier this week, I implemented a bearish call spread on Lululemon (LULU) at the 225 and 227.50 strikes (2.50 wide) for $1.20 premium.
The next day, my spread was looking good and I booked $5,500 premium — almost 50% of the potential $12,000 gain.
Risk vs. Reward
When I implemented the LULU trade, the stock was trading right around $225 — meaning my sold call option was ATM.
Had I been less aggressive on my strikes, I wouldn’t have commanded as high a premium, especially compared to my potential risk.
Per the image below, by selling the OTM 227.50-strike call — bid at $8.75 on the day of my LULU trade — and buying the 230-strike call for the ask price of $7.85, the most I could’ve made was 90 cents a spread, or $9,000 ([$8.75 – $7.85] x 100 x 100).
My risk would’ve been $1.60 a spread (2.50 – 0.90), or $16,000 total. That’s much less balanced than the $12K/$13K spread I put on.
Another reason I prefer 2.50-wide spreads? Because going too wide could wind up costing you.
Before this week’s LULU winner, I put on a separate bear call spread — this time 5-wide. In simplest terms, I was trying to get $20,000 by risking $30,000. Unfortunately, it didn’t work out.
But as I’ve said a million times, dwelling on your trading mistakes gets you nowhere. You have to shake it off, turn it into a learning experience, and focus on your next good win.
What I learned from that is, placing a big trade outside your set parameters can pay off big, but it can also cost you and offset lots of healthy, smaller losses.
There are several reasons why I focus mainly on big-cap stocks. To start, many small-cap stocks — what I trade over at Jason Bond Picks — aren’t optionable.
Plus, weekly options have been around a few years now, but in the grand scheme of things, they’re still relatively new, so not all stocks even feature weekly options.
Just to name a few — O’Reilly Automotive (ORLY) and Boston Beer (SAM) are both stocks trading above $350, yet only offer monthly standard options.
And when you’re the option seller, like I am, time decay is working in your favor. You don’t want an option with a long shelf life, because that’s more time for the stock to move against you.
In closing, a wealthy client once said to me, “Everybody loves gunslingers, but the thing about gunslingers is… you don’t see a lot of old ones.”
While you don’t have to follow my Weekly Windfalls trades to a T, be consistent in your strategy — whatever that strategy may be — and don’t shoot from the hip.
You’re going to have some losing trades sometimes, that’s part of the game, but when you find something that works more often than not, like the vertical credit spread, regularity in your trade parameters is key.