Updated: Aug 24
Today I am going to give you a sneak peek into a bullish option trade I did on Domino’s Pizza Inc. (DPZ). This brought in a profit of $770 or 71% return in just 30 days. That’s more than 2% a day!
As always, I started my studies from the stock chart using different time frames and trying to analyze the patterns and trends to identify significant price levels like supports, resistances or trendlines.
Then on the 23rd of February following a disappointing Earnings Release announcement the underlying dropped over 12% in one day alone. This kind of sharp movement can happen at times as markets overreact to certain news. I started giving a closer look at the stock as the price continued to decline and got closer to a significant support level between $290 and $300.
Selling a Vertical Spread Option Strategy
I believed in a quick rise back of the underlying and on Monday the 27th of February 2023 decided to go ahead and sell a combined vertical option strategy called Bull Put Spread. This strategy involves the simultaneous purchase and sale of options of the same type (put options) with different strike prices, but same expiration. This kind of position generates a credit from the outset in your account as the options sold have a higher premium than the options purchased.
The strategy was made up by purchasing 2 contracts of the $290 put option with expiration April 21st, 2023, and, simultaneously, selling 4 contracts of the $300 put option with expiration April 21st, 2023. Both legs had 53 days left prior to expiration. This does not mean I had to wait for 53 days before closing this trade and making a profit. In fact, you can decide to purchase back your strategy at any time to either collect a profit or limit your losses. Options offer extreme flexibility and the ability to adapt to any market condition.
As represented on the video above, you have a well-defined Z-shaped risk profile with a losing area below the downside breakeven point at $295.40 and a profit area above the same price level. The maximum investment or maximum risk is limited and known from the outset. In fact, the maximum you can lose at expiration is $1080. You reach the maximum profit potential of $920 if the underlying is trading above $300 at expiration.
Benefit from Time Decay and a Directional Trend
My goal with this trade is for the stock to bounce back slightly and trade above the $300 mark and I have 53 days for this to happen. What is great about this strategy is that thanks to time decay you can make a massive profit - up to 85% on the funds invested - with the stock trading in a price range just above $300. This is because above that level you can benefit from the passage of time and make a daily profit as your options get closer to expiration.
Once in the trade, that’s not much else you need to do. Just wait and be patient as the days pass by. You want to monitor the price action every day for a few minutes and check everything is going according to plan. If the stock keeps dropping in price, you will see your position moving to losing territory.
Of course, you will never want to collect the maximum loss. For this reason, you should establish in your trading journal the price level at which offset the trade and collect a partial loss, or at which make an adjustment to defend the position and enhance the chances of success. All these analysis will depend also upon how many days left there are in the trade. The more days before expiration the higher the chances of the position going back into profit. These are complex considerations and I do not want to run the risk to overwhelm you. This is something I like to discuss in my courses and 1-2-1 coaching sessions.
On Wednesday the 29th of March, after 30 days of being into the trade, the stock traded upwards to $327. The trade was initiated with the underlying trading around the $295 mark. The rise of the stock combined with the effect of time decay helped bring in a profit of over $750 and a rate of return of 71% in 30 days.
I’ll see you on my next release of the Options Trading Diary.