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I’ve gone through all kinds of different systems, where they said, “You can predict 80% of the increase in the price of the stock. Or you can predict the price of a stock 80% of the time.”
Maybe you can predict it 80% of the time, but what about that other 20%? And how do you trade that?
What we’re doing is, by creating the types of trades that we’re going to be putting on in the system, we are giving ourselves a huge potential to profit. We don’t have to predict price anymore. The price, once we put this type of a trade on – it doesn’t matter if the stock goes up, or the stock goes down. It could go down to 69, and we still get our full potential profit, from this system.
The only problem that we run into, is when the price starts to come down, either toward our lower strike price, or at the higher strike price. Then what we do, is we simply adjust. All we have to do is adjust our prices, and adjust our contracts, to take advantage of the new opportunities and the new prices available to us, if the price of the underlying stock reaches our breakeven points.
We never have to be too concerned about price. That is one of the biggest hang-ups, and one of the reasons why the majority of people do not make money in the stock market. They are only playing price. The only rule of the stock market is that prices fluctuate, and that’s all. We cannot predict the future price.
Once you put on a trade like this, the most important thing that you should understand, is it will probably need adjustments. You’re not going to be able to put on this position, and this is the way the majority of people who lose in the market do it. They put on a position like this, they leave it alone, they never see it again. All of a sudden, they look at their trades, and they see that the index is trading at 78, and they’re at their maximum loss position.
They say, “Oh, this doesn’t work.” The technical term for this type of a trade is that we’re selling an iron condor. They’ll say, “That doesn’t work. I’ve done iron condors. I put these things on, and the price moved against me, and I was at my maximum loss point. I did it three or four times, and I’m never going to do them again, because they don’t work.”
Well, the reason that they don’t work is because you don’t manage your trades. One of the CDs that we’re doing, of course, is on portfolio management. We’re also doing one on adjustments. Take a look at those. Take a look at what happens, in a live trade. That’s one thing that separates us from a lot of people who are teaching different strategies, and so forth.
We will show you live trades in our demonstration account. We’re putting real money on the line, on these things. We’ll show you exactly how to adjust them.
For example, in one of the videos that you’re going to see in the adjustment CD, I show you a SPY adjustment condor. SPY is the SMP 500 Spider ZTF. I’ll show you that quickly.
What happened was, we put a trade on right down here, when it was at 133.5. All of a sudden, it moved dramatically against us. We had set our short call option up near the 140 level. We almost got nailed right up against our 140 call.
We didn’t get hurt, because we adjusted it. Take a look at that, to see how you can actually – the reason that people do not make money in the market is because they don’t know how to adjust. They put the trades on, they forget about them, they take their losses and move on – or they put them on, and they adjust their trades in a wrong way, that gives them an even worse position than they had originally. If they left the position alone, maybe they would have been okay, but they adjusted it in the wrong way, and put themselves in some danger. We want to try to avoid that as much as possible.
Let’s take a closer look at this graph. The analysis took that Think or Swim gives us is really a great tool. It allows you to take a look at what exactly the picture of profitability this trade looks like. If this trade goes to expiration, which is the 3rd Friday of May, and this index IWM stays between 74 and 68, we make our maximum profit.
How do we tell what our maximum profit is? If we move our cursor along this line, we can see right down here, that the green line is the date of expiration, which is 5/17. We will make a maximum of $46 on this position.
What happens is, our current profit and loss is this white line. That’s our profit loss, as of today, on April 20. You can take a look at this, and you can say, “We’re on 71.67 on the index. Our profit on this position, if we hold it all the way to expiration, is $46. But even if we put this on today, we immediately lose $2.93. We just put this on. How can we lose, the very first day? $2.93. We’ve already lost $2.93 on this position.”
Remember that, when we take a look at this again – that the difference between the bid and the ask is the reason that you are never in a profitable position, the first day that you put these on. Because you’re selling these at 78. In order to close the position, you have to buy it out.
If you sold these at 78 cents, and you bought it back at 82 cents, what’s the difference between those two prices? It’s about 4 cents. You’re immediately losing 4 cents because of the bid-ask spread. That’s what they call this – the bid-ask spread.
If you sell it at 78, you have to buy it back at 82. That’s a 4 cent loss. You’re buying the 75 calls at 50 cents. If you wanted to sell them back, you would only be able to sell them back at 49 cents. You lost a penny on that one. You lost 4 cents on that one, you lost a penny on that one. That’s 5 cents right there, and that’s only one side of the trade.
If you go to the other side of the trade, you’ve lost another 4 cents there, and on the 67s, you’ve lost another 3 cents there. Altogether, you’ve lost about 12 cents. 12 cents times 4 contracts times 100 is close to $6.
You’re lucky you’re only losing two. If you went into the market at this moment, you’d probably lose 6. That’s why you would immediately lose money. That is because of the bid-ask spread, between the options.
But that’s okay. That’s to be expected. Every time you put one of these positions on, you’re going to lose money, the very first day. What we want to do, and what happens is – remember, there’s two absolute rules of option contracts. Number one: They will fluctuate in price. The reason that we’ve put a spread like this is because we’ve given it a lot of room for the price to move around in. It will fluctuate in price.
The second absolute rule of option contracts is that they expire. What happens is, today – our option contract looks like this; our profit and loss looks like this, and we’ve lost $2.93. But over time, look what happens. This is today, the white line. This green line, now, is about a week from now. A week from now, all of a sudden, if our price remains relatively stable, we have a profit of $4.15.
Then, if we go all the way out to May 4, which is just a couple weeks away – our profit is now $14.75. The options will expire. The further out – let’s say if you buy a 90 day option, an option that expires in 90 days is going to be worth more money than an option that only has 30 days left to it. Because the closer you get to expiration, the less probability that that option will actually have any value, if the price remains relatively stable.
Of course, prices fluctuate all the time. So that option contract is actually going to be worth more money at one point, and less money, at some point. Then, as we get very close to expiration, like 30 days prior to the expiration – all of a sudden, at that point, the option contract loses value on a daily basis.