Updated: Aug 23
Dear trader, today I want to show you an amazing trade I did on Caterpillar Corporation (CAT) on Thursday the 25th of May 2023. I could make almost 100% profit in 19 days trading an advanced option strategy called The Straddle.
I started my analysis on the stock chart of Caterpillar from within Interactive Brokers and the Options Analysis managing software, which I teach step-by step in my video course. These professional tools give you the ability to analyze different timeframes and apply several studies and indicators to the chart to have a better understanding of the market sentiment and momentum.
Identifying a Consolidation Pattern
I could recognize a consolidation pattern on the underlying security, which is a sign of a possible price breakout. This is quite a strong signal. You do not know in which direction, but the stock is likely to breakout and by anticipating this move you can profit big. I knew right and then that there were the conditions in place to trade an advanced options strategy which can be expensive as involves buying options far away from expiration. However, the strategy was totally worth it as I was expecting a sudden move of the underlying security either upwards or downwards.
On Thursday the 25th of May 2023, I decided to go all in by trading a Straddle option strategy. That involved the simultaneous purchase of 1 contract of the $210 call option expiring on the 17th of November 2023 and 1 contract of the $210 put option expiring on the 17th of November 2023. Trade created an entry debit (and maximum risk) of $3561 with only 1 contract purchased. This was due to the fact that both puts and calls had still 176 days remaining before expiration and the premium paid included the price paid for the time value available and the options implied volatility.
I am aware these concepts may sound overwhelming, but don’t worry this is completely normal. Options trading is a complex subject matter. That is why I have totally broken it down in easy-to-follow and step-by-step modules in my video course “How To Become an Options Trader”.
In the video below you can have a sneak peek into the trade and look at the stock chart and risk profile of the strategy.
Making a Profit Regardless of the Market Direction
Clearly you can see that a Straddle allows you to make a profit either the stock goes up or down. You may have to pay a substantial premium to be in, but your reward can be potentially unlimited either on the upside and downside if the underlying experience a price explosion in a reasonable amount of time. In fact, you don’t want to be in this trade for too long to avoid being affected by time decay. Furthermore, as you are purchasing volatility with your options, you are expecting an increase of implied volatility to help your position and not a decrease which could have a negative impact on the trade.
Going back to this specific trade, I managed to make almost 100% return in only 19 days, but not without having to make an adjustment throughout the way. In fact, after a few days, on Thursday the 1st of June the stock is still trading in the same range around the $210 mark, and I decided to go bigger in and double up the position as I believed that an explosive move of the underlying was getting closer. Now I have two contracts each of the $210 calls and puts and my risk exposure goes to $6834. With this move I managed to adjust the position according to the price action and enhance the overall profit potential.
Closing Up the Long Straddle
Now it's where this trade becomes sweet. There was actually an explosion of the underlying price going upwards and on Wednesday the 7th of June, I decided to partially close the position to lock in some profits and reduce the risk exposure. At this stage, I am making a profit of $1902 and the maximum risk for this trade is lowered to $2466. On Tuesday the 13th of June 2023, with Caterpillar moving further upwards I decided to exit the strategy collecting an outstanding $2400 profit in total.
On this trade, I could get advantage of the anticipated strong directional move of the stock and from an increase in implied volatility, which more than offset the reduction in value of the options premiums due to the effect of time decay.
Hope you enjoyed my trade!
I’ll see you on the next release of the options trading diary.