Hey trader,
You finally get a winner on the board. Then you watch it round trip back to flat by the next open.
Plenty of traders give back open profit while they wait for a bigger move.
The market pays nothing for that kind of patience. A cheap long call can be restructured so the trade cannot lose money again.
My USO September 9, call cost 48 cents and sat up $102 by the close on Tuesday. I had not sold a thing against it yet.
Today I’ll show you the sequence that turns an open gain into a floor you keep.
That way, the worst you can do is break even.
Here’s how it works.
The Option Comes First
Tuesday morning in the futures room I took a long call on USO for September 9 expiration. The cost was 48 cents.
I bought more time than I thought the move would need.
That choice pays off later. Extra time leaves room to sell a strike against the position instead of racing the clock.
Buying the long side first also fixes the worst case at the start. My risk stops at the 48 cents, which is $48 on a single contract.
Nothing overnight can take more than that.
What 48 Cents Turned Into
Crude climbed most of the afternoon and the call climbed with it. By the final minutes of the session it sat up $102.
A $48 purchase carrying a $102 open gain has more than tripled.
I had not sold anything against it at that point. The position went into the close as a plain long call.
The Sale That Ends The Loss Side
Here’s the arithmetic that matters. My debit was 48 cents.
Selling a higher strike call against it brings in a credit. Once that credit clears 48 cents, more money has come in than went out.
The long call covers the short call above it, so the short leg carries no open risk. My floor at expiration becomes the difference between the credit and the debit.
That floor sits above zero. The trade cannot produce a loss from that point forward, which is the reason I called it a guaranteed no losing trade in the session.
Notice what the sale does not require. Crude can stall, reverse, or gap lower after the fill.
The credit is already in the account.
The Two Versions I Had On The Table
Both choices were live Tuesday afternoon. They trade upside for certainty in different amounts.
- Sell two strikes out and carry a $2 wide spread. The full width pays $200 if USO finishes above both strikes at expiration.
- Sell the 148 strike instead. The credit locks in $25 no matter what happens, with roughly $100 of additional upside still available above it.
The 148 version pays the smaller guaranteed number and keeps more room for the move to continue. The two strike version widens the payout and gives up the rest of the run.
I lean toward the wider spread when the trend still has structure above it. The tighter sale fits a market that looks tired.
When The Credit Does Not Cover Your Cost
Sometimes the strike above will not pay enough. A 20 cent credit against a 48 cent debit leaves 28 cents at risk.
You still cut your exposure by more than 40% on that fill. Calling it a no loss trade would be wrong.
Check the credit against your debit before you send the order. The number decides which kind of trade you now own.
Why USO Instead Of Crude Futures
Crude futures run near 50 to 1 leverage. Overnight shocks in that market can be brutal.
USO gives you the same directional read on oil without those gaps. You can trade the shares or trade options on them.
The calmer instrument makes the premium sale practical. A position you can hold overnight is a position you can manage in steps.
Why I Held Off On Tuesday’s Sale
Crude oil futures went bullish on the monthly back at 90, and topside pressure sits near 95.16. The weekly zone on crude runs from 95.16 up to 97.
I don’t think the climb is finished. Selling the upper strike into strength hands away the part of the move I’m still expecting.
Weakness is my trigger instead. On USO there’s a gap and a reversal just overhead, and a test of the 150 level or a push to 151 this morning gets me selling.
The call was still open when the session ended. There is no outcome on it to report yet.
The Same Sequence With Puts
This runs identically on the short side. On a channel break in AXP I would buy a put near a 70 delta and go out three months.
Every small bounce after that becomes a chance to sell a 30 delta put against it. Done well, the cost reaches zero in about a month and two months of time remain, though the timing has to cooperate.
What This Means For You
Run these three moves on your next long option.
- Buy the option first and buy more expiration than the move needs. Your maximum loss is set at the debit before anything else happens.
- Wait for a stall, a gap fill, or a test of your resistance number before selling the strike above. Weakness is the entry that pays you for the short leg.
- Compare the credit to your original debit before the fill. A credit above the debit ends the losing scenario, and a credit below it still cuts your exposure.
The order of those steps carries all the weight. Buy first, get paid second, then let price do whatever it wants.
Your Next Step
Pull up your current open winners tonight. Find the ones where you paid a small debit and the option has since gained.
For each one, price the strike directly above yours and the one after that. Write down what each sale would credit you.
Compare those credits to what you paid.
Then set an alert at the level where you’d expect the move to stall. When price gets there, you sell instead of guessing.
Buy the option first, then get paid to keep it.
Blake Young
Senior Market Strategist, TheoTRADE
