Updated: Aug 23
Let me show you an option trade I performed recently on Alcoa Corporation (AA) which gave almost 50% profit on the money invested.
The Reasoning Behind the Trade
After analyzing the underlying security 180-days candlestick stock chart, on Tuesday the 30th of May 2023 I could identify a strong support level around the $35 mark. Around this price level, in the short term I was slightly bullish and decided to enter an advanced option strategy which could benefit from an upwards movement of the underlying security, as long as the stock moving in a price range around $35-$36.
The goal when placing these kind of trades is to have an edge in the market and bring the odds in your favor. You want to combine options together to create advanced strategies which can give greater chances of success than just holding the outright stock.
In this specific case, I decided to create a Bull Put Spread by purchasing 4 contracts of the $30 Put Option with expiration July 21st, 2023, and, simultaneously, selling 4 contracts of the $35 Put Option with expiration July 21st, 2023. This creates a well-defined risk profile which is graphically displayed in the video below and represented in the Risk Graph.
A Bull Put Spread Risk Profile
The risk graph of the option strategy shows that there is an upside potential on this trade, but also, you can profit from the stock trading in a price range just slightly above $35. Even a small movement up of the underlying security can give you the maximum profit.
The maximum loss and maximum profit for this trade are known from the outset. I can’t lose more than $1060, this is the amount invested and can’t make more than $960. In other words, the max ROI on this trade is an outstanding 88.68%. Breakeven point is fixed at $32.65 (BEP). Anything above is the position profit area and anything below the BEP is the position losing area.
The options traded have a remaining life of 52 days. It means that by expiration you want to be at least above the breakeven point, and ideally above $35 to aim for the max profit. However, you do not really need to get all the way to expiration to get a profit and if you realize that the trade is not going as planned you can cut losses earlier and avoid getting the max loss. This gives you a certain amount of control, which is what I love about options trading.
Monitoring the Trade and Collecting the Profit
At this point, once you are in the trade and all the setting up is done, you can literally monitor your Bull Put Spread trade a few a minutes a day using options management software and your brokerage platform. This can be done on the go from your phone or from anywhere. Action will be needed only in the event of a strong price action of the underlying which determines a significant change of the initial conditions. In that case, you may decide to either adjust your trade to enhance the chances of success or close it all together collecting a profit or taking a loss.
On Tuesday the 13th of June 2023, with stock trading upwards I decided to exit the strategy when the underlying security was at around $37 and the options in the strategy were still relatively far from expiration with 38 days remaining. I ended up collecting a profit of over $500 and a rate of return of 45% in just 14 days. This was a great result as I did not have to make any adjustments to my trade, and all was extremely smooth.
I’ll see you on my next release of the Options Trading Diary.