In this week options trading Tutorial, we are going to introduce a strategy on how to trade options for a decent gain.
We have previously shared Day trades we took on expiration day and benefited from them.
This time, we are bringing you a Swing Trade we took on FCX and learn from it.
How To Trade Options For Decent Profit
The challenge we face as traders is to ensure with high probability the correct direction of the stock we are trading.
There are triggers or indicators that can help you and me with this.
Over time, such triggers or indicators provide us with a degree of confidence.
It is that confidence that can help determine our risk on the trade.
The risk is how much money to dedicate to the trade.
Based on the cost of each contract, that will in turn determine how many options contracts a trader buys.
The trade we are sharing today presented a high probability for profit because of this historical study on the stock.
How To Trade Options For a Profit: FCX Setup
We have previously shared with you our multi year study of the Friday Bulls stock.
That study ranked Freeport-McMorRan Copper (ticker:FCX) as our Number 2 best performing stock on Fridays.
Which means that the probability of success on profiting from calls is high on Friday for FCX.
This year alone, that probability is over 52% according to our study.
If you are thinking, wait a minute.
That implies that there is a 48% for calls not to be profitable ?
Yes, that is correct. So how can I feel that confident ?
Answer: Confidence. Remember we made 400% gains on Nov 1 on FCX calls.
We could have made up to 1600% gains.
Our Entry Condition
The way we made this trade safe and easy to benefit from is by taking advantage of the lack of action of Thursday.
We knew that the trend on recent Fridays has been bullish.
So we decided to buy calls with a limit order on Thursday Nov 20.
But at the same time, we hedged this trade by buying Puts as well.
We did it in a way that whatever direction FCX was to move on Friday morning, we were in the right position to profit.
Of course, FCX could have not moved that much on Friday.
Here are the two legs of our straddle:
- Buy 4 FCX Nov22 11 Calls for 10 cents per contract
- Buy 3 FCX Nov22 11 Puts for 10 cents per contract
This is our first time we introduced this strategy called straddle.
As you can see, it consists of a Call and a Put at the same strike and same expiration.
The basic idea is for the stock to move: down or up by a big percentage (at least 1.5 percent) and the overall trade will be profitable.
Notice how we the position had more calls (4) than Puts(3).
Well, that is the way to reflect our bias or confidence level in calls compared to Puts.
The study and recent trades on FCX suggested this: 52% confidence on Calls as shown above.
Below is a view of the two orders execution:
Scaled Exit on FCX Calls
On Friday pre-market hours, FCX was trading up over 1%.
Our hope was that the bullish momentum will carry on during live session.
And it did in the classic Gap and Go move. This turned in a very easy worry-free trade.
Have you been noticing the pattern of these trade strategies we have been sharing ?
How many times have I used the word worry-free ?
Trading is not supposed to be always stressful where we are fighting against the market.
Once a trader gets to this understanding, the Profit and Loss Curve becomes enjoyable to watch.
As we have done before, we used our scaled exit method as shown below.
It is worth mentioning here the times of each exit.
- 8 minutes into the session, the calls are worth 33 cents or 230% gains and we sell 1
- 1 hour and 3 minutes after the Open, the same calls are up 300% and we sell 2
- 3 hours and 9 minutes after the Open, our last call is up (46 cents – 10 cents)/(10 cents) = 360%
We lost on the puts leg which ended up expiring worthless.
However, the calls more than made up for it.
The calls paid just shy of 300% not withstanding the small fees.
In the overall trade, we made a Profit of 125%.
Frankly, we never had to sweat at any time during this swing trade.
We hope that you found value in this case study on How To Trade Options.
The next step is to scale this type of trade by increasing the risk.
Do you agree with our exits ? Do you think we sold the first calls a bit too early and thus left money on the table ?
Let us know in the comments section how you would have managed this trade to maximize your profits.