By now you know that my goal with certain, specific trading methods is to get a 100% return on investment (ROI) with virtually every trade opportunity.
With trading tools and rules I use, I look at the vast array of options available to me so that I can find the ones that show a possible 100% return (or a “doubler”).
And I like to know if it’s possible to double BEFORE I spend my first dollar on a trade.
I like to keep my trades as simple as possible, but sometimes that means I’m looking for an opening others just don’t see.
So rather than give up on a trade I think has great potential, I’ll work a little magic… and in the case of a recent Amazon.com Inc. (Nasdaq:AMZN) trade, it led me to an easy 110% return.
Let’s take a look at my way to make a profitable trade when others see nothing…
The simplest form of options trading is buying call or put options. I like to buy a call or put option and know that over the course of a specific period of time, if the anticipated stock move happens, the option I bought will double in value.
I have trading and options analysis tools that help me figure this all out ahead of time.
But sometimes, buying or going long on an option just simply won’t yield a double.
Rather than just give up entirely on that stock and say there is no options trade available, I look for an opening or a “loophole” in the options chains that can lead me to a double or 100+% return.
A “Loophole” By Any Other Name is Just as Profitable
This “loophole” trade is another name for a Debit or Bull Call Spread.
In either case these are “debit spreads,” because to initiate or take the trade, you are doing so at an upfront cost or debit to the account.
I am going to show you the loophole trade I made on Amazon.com, Inc., but first let me break down the mechanics of how this loophole trade works.
A Bull Call Spread is used when you expect a stock to move higher in price, and is accomplished by buying a call option (one or more) at a specific strike price.
At the same time, you also sell the same number of call options at a different, higher, strike price that shares the same expiration month as the call options you bought.
What needs to happen in order to make the maximum amount of money possible on this trade is for the stock price to go above the sold strike price figure and be there at expiration.
The maximum profit is the difference between the two strike prices, less the amount of the original cost or debit to the account when first taking the trade.
So, with this in mind, let’s review how we doubled our money on this “Bull Call Spread” in AMZN.
On June 15, I was looking at AMZN to make a moderate move higher within a certain time frame, and when I looked to find a call option trade that could double in value when that AMZN move happened, there wasn’t one.
So, the “double” was walled off. It wasn’t there with a straight long call trade. I looked for a “loophole,” an opening in the options where a different options strategy would give me that chance to double.
Voila! I found one in the June15 2015 $430/$435 Call Debit Spread.
Here is what it looked like on my screen, and how I place it:
What this means is that I was trying to simultaneously buy the $430 call and sell the $435 call at a cost of no more than $2.00 per contract, ($200 risk/cost).
It happened at $1.98 or $198 per contract.
The situation was that any time before or at expiration, someone has the right to buy (call options are the “right to buy” options) AMZN from me at $435. If that were to happen, I could then exercise my right to buy AMZN for $430.
The difference in the strike prices is the max profit. In this case $5.00 or $500 would hit the account as if the stocks were bought and sold, but then that $5.00 or $500 would be offset by the debit or cost in doing the trade to begin with, which was -$1.98 or $198.
My goal on these types of trades is to double or get a 100% return, so I set the trade plan to exit or close the trade when the value of the spread got to $4.00.
Now Let’s Take a 110% Profit
In just four days, AMZN made enough of an upward move for the spread to hit that $4 valuation. In fact, the trade went to $4.17, or a value of $417 per contract. The profit, less fees, was +$2.19, or $219 per contract.
- AMZN June 19, 2015 $430.00 Calls: sell-to-close at $7.42
- AMZN June 19 $435.00 Strike Calls: buy-to-close at $3.25
That was a double or +100% ROI in just four days!
If all you did was look for a straight option trade to do this, it wasn’t there.
But, by looking for a “loophole” trade that could work, we found one.
Now don’t expect to have a double happen that fast all the time, as this was an exception rather than the rule…
But a double in 30 days?
Oh that is quite doable, and with a loophole trade, it’s just that much more probable!
Until next time,
America’s #1 Trader