Locking In Profits

“So, that was an interesting month. That is, if you think crazy is interesting! Since crazy is probably going to stick around for awhile, let’s take a look at how the Options For Income portfolio did in May.”

That was the opening paragraph from a blog post I did at the end of May. Here we are at the end of August and things have gotten even crazier! While the sales of Pepto- Bismol to stock and options traders may be at an all time high, there is opportunity in all of the volatility. That is a big part of what Suz Smith and I try to provide with the Options for Income service. In this post I would like to show you one method that we utilize to maximize the reward/risk of the risk capital in the option portfolio. First, lets review the portfolio’s performance so far this month.

Up 12.53% on the month, 5.68% in the last week and 2.94% in the last day. Not bad but, as I mentioned above, how we generated those returns is far more important due to the extreme price swings in the market. It is easy to generate a big percentage gain on any given day but it is extremely hard to hang on to that profit as prices can easily move several percent in either direction. Let’s examine the portfolio’s current position in SPX and see how we removed all risk (and actually locked in a profit) but still have the ability to make a huge return in a position.

All Options for Income subscribers are enrolled in the text messaging service where we post educational information about option positions as well as trade alerts when we are entering, adjusting, or exiting a position. Here is the text from last Monday when we entered a bearish position on SPX.

By the next day, the position had a 22% profit and I posted this in the members only chat room:

As I mentioned, education is an important aspect of what we strive to provide with the options service. We want you to understand why we choose the position’s that we do. In this particular instance, I chose a structure known as a Broken Wing Butterfly (BWB).

Fast forward to yesterday afternoon. SPX was tanking and the position was profiting nicely. However, as you know, a single tweet could send the SPX rocketing in the opposite direction! So, what to do? We could close the position and take a relatively small profit but then we are out of the trade and have no ability to make an even larger profit. Is there a way to lock in a small profit while maintaining the potential of a much bigger profit? I’m glad you asked! Here is the trade alert I posted yesterday afternoon.

When I first established the position I chose 2 different lengths of the Vertical Spreads that make up any kind of Butterfly position. I paired a $50 wide Put Vertical DEBIT Spread (2850/2800) with a $25 wide Put Vertical CREDIT Spread (2800/2775). That created a BWB. There were 2 reasons I did that. One reason was to give me greater short (negative) Deltas to profit from what I though was going to be a move lower in the price of SPX. The other reason was to allow me to sell of a portion of the BWB to reduce the position’s risk if/when SPX did move lower in price. In order to understand this concept better, think about the component’s of a spread. The 2850/2800 $50 wide Put Vertical Debit Spread is the same as ten $5 wide spreads. (2850/2845, 2845/2840, 2840/2835,……2805/2800) Each of those spreads has a value and can be sold off at any time. Yesterday, we sold off four of the $5 wide spreads (or one $20 wide spread) for $6.85. The original purchase price of the entire BWB was $5.60. So we had just now sold off a portion of the spread for more than we paid for the entire spread itself. Since Suz and I feel there is potentially more downside to come in the SPX we want to maintain this bearish position. However, with the market extremely oversold we could see a large bounce in price at any time. We will use the opportunity of higher prices to add back more risk to the position to benefit from another move lower. Here is the larger image of the current position in SPX.

This should give you a pretty good idea of what Suz Smith and I offer our subscribers at the Options For Income service. We don’t just throw out a trade suggestion without giving you some context about why we are placing a trade in the first place. We believe in educating our subscribers so that they can actually learn to trade like this on their own. Last, but definitely not least, every trade we place is a defined risk position where we often have the ability to reduce the original risk by a substantial amount as the trade progresses. We believe risk reduction correlates highly with stress reduction. After all, trading isn’t much fun if you can’t sleep at night!

That is all I have for you now. If you are not a subscriber and you would like access to the Options for Income subscriber chat room, you can sign up for a 14 day Free Trial to try out the service. What have you got to lose, it’s free!

CLICK HERE for the Options for Income Free Trial.


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Paul Frey is a 30+ year trader with experience in equities, options, and futures. In addition to trading he manages Vega Options providing option educational services to new and experienced traders who are looking for improved results. He teaches strategies and techniques that reduce or even eliminate the initial cost of a trade while still maintaining potential future profits.

25th Aug 2019

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