{"id":21826,"date":"2024-05-29T07:30:33","date_gmt":"2024-05-29T11:30:33","guid":{"rendered":"https:\/\/www.jeffclarktrader.com\/?p=21826"},"modified":"2024-05-29T07:30:33","modified_gmt":"2024-05-29T11:30:33","slug":"a-different-way-to-profit-from-options","status":"publish","type":"post","link":"https:\/\/stage.jeffclarktrader.com\/market-minute\/a-different-way-to-profit-from-options\/","title":{"rendered":"A Different Way to Profit From Options"},"content":{"rendered":"

Managing Editor’s Note: <\/strong>Today, we’re handing the reins to colleague Larry Benedict – a market wizard and legendary hedge fund manager.<\/p>\n

Today, he’ll share how he plays options using a unique strategy that’s delivering his subscribers solid gains in just a day.<\/p>\n

Here’s Larry with the insights…<\/p>\n

\n

Many traders are familiar with simply buying options.<\/p>\n

By buying an option, you can gain exposure to a stock’s moves without needing to own shares.<\/p>\n

If you get your timing and direction right, it can pay off with outsized gains.<\/p>\n

But if the move you expect doesn’t<\/em> come, your option’s value can shrink fast.<\/p>\n

That’s why at The S&P Trader<\/em>, I flip this idea on its head…<\/p>\n

I don’t try to work out where the S&P 500 (SPX) is heading. Instead, I look for a range where SPX is unlikely<\/em> to trade.<\/p>\n

That might sound confusing, but this strategy is one of the best ways I know to generate regular income.<\/p>\n

In fact, it played a big role in how I went 20 years without a losing year during my career on Wall Street.<\/p>\n

So let me explain using a trade we did earlier this month.<\/p>\n

This options strategy gave my subscribers the chance to make a $644 gain (per contract) in a day…<\/p>\n

Capturing Premium<\/h2>\n

The strategy we used to generate that $644 premium is a “bear call spread.”<\/p>\n

We’re “bearish” about SPX. So we think the SPX will close below our call options’ strike prices.<\/p>\n

And a “spread” simply means there are two parts (“legs”) to the trade.<\/p>\n

With this strategy, we sell a call option and buy a slightly different one at the same time<\/u>.<\/p>\n

To see how it works, let’s check out our SPX trade in the chart below…<\/p>\n

<\/p>\n

S&P 500 Index (SPX)<\/strong><\/p>\n

\"Image\"<\/p>\n

Source: eSignal<\/em><\/p>\n

On May 1, SPX started the day by rallying strongly despite the recent downtrend.<\/p>\n

I suspected that sellers still had the upper hand, though. And I didn’t see any data releases coming out soon that had much potential to shake the market up.<\/p>\n

So when the market reversed sharply later that day, I decided it was time for a trade.<\/p>\n

I placed a bear call spread that expired the next day…<\/p>\n

We sold a call option with a 5100 strike price (lower orange line). That was just above the day’s high of 5096.<\/p>\n

At the same time, we bought a call option with a strike price of 5120 (upper orange line).<\/p>\n

Our sold option earned us a credit, while our bought option cost us a smaller amount.<\/p>\n

Together, they generated $6.44 in premium. That equates to $644 per contract.<\/p>\n

And as long as SPX closed below both our strike prices (5100 and 5120), we would get to keep all of that premium.<\/p>\n

Happily, that’s exactly what happened.<\/p>\n

SPX did recover somewhat the following day. But it closed out at 5064.<\/p>\n

So the full $644 premium remained ours. That’s a handy income in just a single day.<\/p>\n

<\/p>\n

\n
\n

Free Trading Resources<\/strong><\/p>\n

Have you checked out Jeff’s free trading resources on his website? It contains a selection of special reports, training videos, and a full trading glossary to help kickstart your trading career \u2013 at zero cost to you. Just click here<\/a> to check it out.<\/p>\n<\/p><\/div>\n<\/div>\n

<\/p>\n

Managing Risk<\/h2>\n

You might wonder why we bother with doing a spread in this case…<\/p>\n

Why not only sell an option and earn even more premium – and forget about buying the second leg?<\/p>\n

Yet there’s a vital reason we structure our trade this way. It has to do with risk management.<\/p>\n

Let’s imagine this trade went against us.<\/p>\n

Instead of closing at 5064, what if SPX rallied up to 5100 – or even higher?<\/p>\n

Ultimately, that could be a catastrophic loss. We would be responsible for any amount SPX closed above our strike.<\/p>\n

In our spread, though, our bought option caps our maximum loss.<\/p>\n

The most we could lose is the difference between the two options’ strike prices (minus the premium we received).<\/p>\n

In this case, that’s a max loss of -$20 (5120 – 5100) minus the $6.44 we received for the trade.<\/p>\n

So even if SPX closed above 5120, the most we could lose would be $13.56. This equates to $1,356 per contract.<\/p>\n

That still hurts. But it’s much better than a completely unbounded loss.<\/p>\n

Better still, our winning rate at The S&P Trader<\/em> is around 80%. We’re banking far more wins than losses.<\/p>\n

If you joined me at the start of this year, you’d have had the chance to bring in $32.58 (or $3,258) in profits so far for each contract you traded, as of last Friday.<\/p>\n

That’s the power of using this spread strategy to draw in income.<\/p>\n

Regards,<\/p>\n

Larry Benedict
Editor, Trading With Larry Benedict<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

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