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With options trading, even the smallest move in the underlying stock can result in explosive profits.
Last Wednesday, we saw exactly this scenario play out with one of my Money Calendar Alert investment service recommendations. Our stock made its move, our options skyrocketed, and we doubled our money in just a single trading day.
Of course, when you're trading options, those quick moves can work both ways – so you have to grab your profits when you can. If you hang on to a trade for too long, it could roll over, and your winning trade could turn into a loser just as quickly.
Today, I'm going to walk you through that winning Money Calendar case study and show you exactly what happened – and the best way to protect your profits.
Let's get to it…
Money Calendar is an incredible tool that crunches tons of data points to calculate a stock's price move from a start date to an end date, along with the average price move it has made over the past 10 years. It also shows you the percentage success rate of those moves.
On Sept. 8, based on its calculations, Money Calendar recommended Goldman Sachs Group Inc. (NYSE: GS).
Take a look at Money Calendar's "payout appointment" on GS:
Actions to Take
Entry Date: Sept. 8, 2015
Buy to Open: Goldman Sachs Group Inc. (NYSE: GS) GS Sept. 18, 2015 $185 Call (GS150918C00185000) at $5.00 or less
Fills came in at $3.58 shortly after the instructions went out.
Money Calendar showed the average price move happened in seven trading days and had done so 90% of the time, or nine out of the last 10 years.
As you can see in the stock chart above, GS didn't need seven trading days this time. It was more than happy to oblige us the double in just one trading day!
GS gapped up at open and rather than immediately refilling the gap as a lot of stocks do, it proceeded to show a bit more gumption. Within the first 10 minutes of trading Wednesday, the stock popped to a high of $191.41.
That sent our $185 calls into orbit. Here's a snapshot of the option pricing:
The price we needed to achieve a 100% return or double on this option trade was $7.16 (entry price of $3.58 doubled = $7.16).
In the quote above, you can see that the spread widened to $6.70 x $7.50, with the mid-price at $7.10. But this is just a snapshot in time, and you can see the market makers had a lot of room to play around in the spread to fill orders at a variety of prices.
One of those prices filled just so happened to be the one we needed for this trade. In fact, the high for the first 15 minutes of trading on the $185 call was $8.28!
Now, as Wednesday's trading wore on, GS stock eventually began trading lower to fill that gap, which means our $185 calls peaked at $8.28 and drifted lower throughout the day, closing at $4.18.
If you weren't sitting in front of your computer screen during the first 15 minutes of Wednesday's session, you might have missed out on huge profits.
So how do you exit a position like this without having to stare at the screen all day long?
About the Author
Tom Gentile is one of the world's foremost authorities on stock, futures and options trading.
With more than 25 years' experience trading stocks, futures, and options, Tom's style of trading systems and strategies are designed to help individual investors propel themselves past 99 percent of the trading crowd.