If you want to know everything that goes into a trade before I alert it to you, this is EXACTLY what you need to see.
Members of Weekly Windfalls are able to spend limited time per day, because I’m in the background doing a TON of work and identifying the best opportunities.
Then, I’m delivering them to your inbox on a silver platter.
Here’s what I mean…
On Monday I identified a stock, TSLA, I thought had a good chance of going down in price-or at least looked to me to be unlikely to rally more. Here’s part of the watch list I mailed out Monday morning to members. (This type of email will be sent to you when you join here)
It had a huge run higher and the rally appeared to have hit a resistance point. I could short TSLA stock, but that would tie up a lot of capital, and, theoretically, my potential for loss is unlimited to the upside should TSLA continue its run higher. I could buy a Put, but I’m not convinced a pullback in the stock is imminent either, just that the run will likely stall or the stock will pullback. In this scenario I sold a near at-the-money call and bought a further out-of-the-money call which is known as a “call vertical credit spread” (it’s a credit spread because I take in more premium for my short leg than I pay for my long leg.) Don’t worry, it may sound confusing at first, but you’ll learn quickly. I’m here for you!
My maximum profit is defined by the credit I took in, and my maximum loss is defined by the difference between the two strikes, minus the credit. I made this trade Monday when TSLA was pressing up against $340 resistance, before it rolled over the same day.
Here’s the alert that went out including a screen shot of my order entry in TD Ameritrade seconds before I hit submit. (Again, this could be yours when you join here!)
Here’s the chart as of Tuesday’s close. See Monday’s candlestick pressing $340? I refer to this strategy as “high-probability” because I can win if TSLA trades slightly higher, sideways or lower i.e. three ways to win versus only on way to win as the buyer of Puts or Calls.
So as you can see in this real-money screenshot, I sold the $337.50 Calls to someone who bought them. I then made this a vertical spread by buying the $340 Calls. In TD Ameritrade this order is done at the same time, I simply select the width of my spread, in this case $2.50 wide or the difference between $337.50 and $340 = $2.50 wide. The premium I collected was $1.07 for this trade so here’s the math:
Options are insurance contracts and leverage on stocks. Insurance (options) gets more expensive when there is uncertainty in the stock price. Each option contract is worth 100 shares of the underlying stock, this is the leverage i.e. what allows me to use a small amount of money to control a large position in TSLA. Since I sold -100 contracts it’d be 100 contracts X 100 shares / contract = 10,000 i.e. the number of shares I’m controlling with 100 contracts. Within the $2.50 wide spread I was able to get $1.07 premium and what I want to happen is that premium goes to $0 by Friday’s close. It would go to $0 by Friday’s close if TSLA was below $337.50.
How much money would I make? Well you simply multiply the 10,000 shares I control (100 contracts X 100 shares / contract) X the premium which was $1.07 and you have $10,700 is my maximum profit. To determine maximum loss you multiply the width of the spread, $2.50 X 10,000 = $25,000 (maintenance requirement) – $10,700 = $14,300 invested. In the case above the $1.07 premium fell to $.37 overnight as TSLA stock moved away from the $337.50 strike I sold and I collected $.70 / contract or $7,000 profit overnight. Remember, the total profit I could have made on my $14,300 investment was $10,700, but I ducked out of the party early with $7,000 in a day. Not too shabby, right?
Okay, that’s a lot to take in. Just know this, if what’s said above confuses you at all, it did me too as first, now I know it like the back of my hand. Trust me to teach you by committing to learning, you will just need to give me a few weeks and this will start to click and the world of selling Calls and Puts using vertical spreads will blow your mind.
Vertical spreads allow me to trade directionally while clearly defining my maximum profit and maximum loss on entry (known as defined risk). I will look to close profitable vertical spreads with a goal of 50% or more of maximum profit.
Seriously, please name someone else that is going to do this for you…
I’ll wait.
I’m going above and beyond. I ABSOLUTELY LOVE THIS STUFF!
And I want you to love it, too!
I’m confident you will, because there are countless money-making opportunities and it’s a conservative strategy that yields higher percentage returns than anything I’ve done, all while defining and managing risk.
