FREE Option Trade For July 2010 Expiration

Free Option Trade

Free option trade: Here’s a trade I put on yesterday in my personal account. It is a straightforward put credit spread on CME.  Great for papertrading.

It is my belief that the markets will rally into the end of the month. Even without the rally, CME should do fine. It has been performing nicely the last few months and it confirms to the requirements of my new credit spread trading system that I am testing.

Credit spread trading system

Sell to Open July 280 Puts
Buy to Open July 270 Puts

Right now, you can get .85 cents credit for the trade which is $85 per spread. The max loss is $915 and so the Profit Potential is 9.3%. There are 30 days left in the trade until expiration.

The idea is to let it go to expiration and let it expire. If CME drops I would take this trade off when I was down about 15%.

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  1. MIKE LOOS on June 16, 2010 at 1:12 pm

    thanks sounds good on the cme spread. michael

  2. CT on June 16, 2010 at 1:54 pm

    Is that down 15% of stock price or down 15% of option price? This is for the CME free trade july

    • Genius on June 16, 2010 at 2:31 pm

      Down 15% on the trade. since the Margin was $915, once you are down 15% or $137 you would exit the trade. Some traders would let it go to 20% and some others who do credit spreads wait until the short strike is in the money, but since I think we are going higher from here, i dont think the short strike option will be anywhere near the money.

  3. Jeff L on June 16, 2010 at 1:57 pm

    Will you let us know when/if you take the trade off?


    • Genius on June 16, 2010 at 2:32 pm

      Like I said, take it off if you are up 10% or down 15%.

  4. Jim on June 16, 2010 at 2:14 pm

    Need to know if you will email us when/if you exit this trade…


    • Genius on June 16, 2010 at 2:34 pm

      No Jim, i will not email you when I take it off since it is not part of the service. I did the trade yesterday when CME was at 310 and got 1.08 credit. You can simply enter in a limit order to exit the trade if it is down 15% and you should be fine.

  5. Lee F on June 16, 2010 at 2:24 pm

    Thanks. How to do this in Thinkorswim? -Lee

    • Genius on June 16, 2010 at 2:36 pm

      On the trade tab, type in CME, then find the July 280 Put, right click on it, select Sell, Vertical spread. make sure the one you are buying is the July 270, select the mid price and click Send.

  6. Lily on June 16, 2010 at 2:36 pm

    The credit today is 0.70 cents. I enter this trade:
    Sell to Open July 290 Puts
    Buy to Open July 280 Puts

    • Genius on June 16, 2010 at 3:02 pm

      It should be a lot more. I am showing $1.05 right now. Since i sent the email CME has fallen a couple dollars.

  7. will on June 16, 2010 at 2:42 pm

    with a risk reward ratio of 1.5, you have to be right at least 6 out of 10 times to not be losing money. I’d assume that’s no problem for you with this system?

    • Genius on June 16, 2010 at 3:04 pm

      I’m winning about 85% of the time.
      For this trade I kep it very simple, but for my system, if i need i can add a call credit spread and turn the trade into an iron condor as an added hedge.

  8. will on June 16, 2010 at 2:54 pm

    Do you always limit your risk to 15% of capital used in the trade or do you ever let it get bigger than that. If so, what’s been the biggest loss you ever had as a percentage of capital used in opening the trade? Obviously it can never happen that all the money put into a trade is just allowed to “ride” and if it wins it wins and if it loses it is gone. Which is why I’m asking.

    • Genius on June 16, 2010 at 3:05 pm

      There should be a max loss on every trade. For most trades it is 20%.

  9. Stephen on June 16, 2010 at 3:16 pm

    Sorry to be so thick!

    You take in $85 on the trade and close the trade if losing 15% of margin value ($137, as you say).
    So does that mean you close the trade if the spread value reaches $0.85 + $1.37 = $2.22?


  10. Ron on June 17, 2010 at 11:08 am

    How is the margin ($915) calculated?

    • Genius on June 17, 2010 at 11:15 am

      Margin is the amount at risk. Here it is the difference between strikes times the number of contracts, times 100, minus the credit.

      Difference between strikes is 2.
      2 x 5 spreads x 100 = $1000 minus $85 (credit) = $915, which is also the max loss.

      *** Sorry , have to correct this reply.

      I was thinking of another trade.
      Difference is 10. The math is the same forumla though.

      $10 x 100 x 1 contract – $85 = $915

  11. Michaelangelo on June 17, 2010 at 11:39 am


    In your promotional email for this trade, you state this trade has an 84% probability of profit. Using the TOS option trade analysis tools it appears to me that the expiration probability is closer to 68% for this trade. Can you elaborate as to how you arrive at the higher number?

    • Genius on June 17, 2010 at 12:08 pm


      Are you sure you are doing it right? I am still showing today an 80.82% prob of profit with using a 1 SD prob range with 7/17 as the expiration date.

      If you look at the delta of the short strike (which is .17) and subtract it from 1, you get .83 which is 83%. That is another way to get the prob of profit. So either 80.82 from tos or 83%. But definately not 68%.

  12. Stephen on June 17, 2010 at 2:56 pm

    “Difference between strikes is 2”???

    Am I going mad?

    Sell to Open July 280 Puts
    Buy to Open July 270 Puts


    • Genius on June 17, 2010 at 6:53 pm

      No, I am. I was thinking or another trade.
      Difference is 10. The math is the same forumla though.

      $10 x 100 x 1 contract – $85 = $915

  13. Sam on June 17, 2010 at 6:31 pm

    I’m not a member…. yet… but I entered this paper trade yesterday when it had an 80 cent credit.

    In the tool I’m using, the analysis shows an 89.37% probability of max profit and an 90% probability of any profit at all (that the stock will stay above $279.20).

    I admire your strategy. I’m paying attention.

    • Genius on June 17, 2010 at 6:47 pm


      I hope this trade works out .

  14. ROB on June 18, 2010 at 12:30 am

    Thank you Allen for sharing your knowledge and genius on this July free trade. It is most appreciated!

  15. Lily on June 18, 2010 at 11:11 am

    Allen, I appreciate your free trade. I am a new learner and would know what is your ” 1 SD prob range” and how it works? Thanks.

    • Genius on June 19, 2010 at 12:24 am

      That would be a long answer. 1 SD is one standard deviation. It is a term from statistics. The best place to get a proper explanation would be a statistics textbook.

  16. Robert on June 18, 2010 at 4:19 pm

    Allen, I am interested in being a member, but before I do, I need to know more about the exit points. Using this free trade for July, You mentioned exiting if you were down by 15%. In your example, you showed $137(15% of max loss of $915). I am using thinkorswim platform and do not see how to enter the stop at $137. How do I show the 15% limit loss? If I wait until CME drops to $137, both legs would be way in the money, so I know that is not how it is done. Please explain. Thanks!

    • Genius on June 19, 2010 at 12:23 am

      You would have to convert it to an option price.
      For example, if you got a credit of .85 and wanted to get out when you were down $137, you would add 1.37 to the .85 = 2.22. Then you can place a stop loss at 2.22. If the spread every got to that value, you would be out.

  17. Steve on June 20, 2010 at 6:50 pm

    Dear Allen,
    I am a bit confused about your exit strategy. Why not just hang on to the credit spread unless CME gets down to 290 or so. Then you could buy a put at 290, which would convert your credit spread into a 290 / 280 debit spread, but you could then hope for the best (i. e. that CME keeps going down). Or maybe you could buy the 290 put another calendar month out (August) and hope you make money on both trades.

    It just seems to me that allowing only a 15% downside before you get out of this credit spread does not leave much room for CME to move the wrong direction before you must exit the position.

    Thanks for all you do.


    • Genius on June 21, 2010 at 11:34 am

      Steve, those are all fine adjustments. And in certain situations those can be used. But for this trade, since I put it on the blog and will not be sending or posting any adjustments, I wanted everyone to have a simple gameplan to follow where they would not need my help to determine which adjustment to use.

      The simplest plan is to exit when up a certain amount or down a certain amount. I use the more complicated adjustments for member trades but with them i know that members know to check the site, i have their emails and can send out the adjustment in a timely manner.

  18. Steve on June 20, 2010 at 7:01 pm

    Oh, and by the way, IF you are figuring a 15% loss, don’t you use 15% of $85, which is all you are going to make on this trade. That is about $13 bucks, so you’d set your stop loss exit at $.98 per share, or $1.00 if $.98 is not possible….


    • Genius on June 21, 2010 at 11:29 am

      No. Max loss is calculated based on the amount you can lose, not gain.
      Setting a max loss of $13 on a trade taking up $915 in margin is only 1.4%. You’d be knocked out of the trade in no time

  19. Russell Boyer on June 24, 2010 at 12:10 pm

    Looks like i should have paper traded this one. We’re at 15% loss. Would you recommend just unwinding or hold long strike for a bit longer. Im still signing up soon just seem to be setting strikes to close to underlying..Oh got .90 credit on this one. R Boyer (my guess would be unwind and move on right}

    • Genius on June 24, 2010 at 12:55 pm

      That was the plan. get out at 15% loss.
      As I said in the post i am trading this one in my personal account and here is what I am doing.
      I am still holding on. There is still about a 70% chance of being right. And it’s 14 points away from the money which is 7%.
      Could that be a bad move? Yup.
      At least I would wait to see what happens tomorrow. By mid day tomorrow the trade will lose the majority of the value it would lose over the weekend as the market makers’ lower the prices to account for the weekend time decay.

      Adjustment ideas are: to roll the whole trade lower and to the next month. Or you can buy the spread back here and sell it again at lower strikes. Or If youthink it iss till going down, you can buy a 290/280 spread and turn the trade into a butterfly with breakevens at 287.75 and 272.36. Or buy the 290 put and make money as CME continues lower.

      My take is that we will see a bounce in a day or two. But that is just an opinion.

  20. Russell Boyer on June 24, 2010 at 2:12 pm

    Thanks I set my stop at the short strike of 280 anyway and hope for a spike to enter call spread at 310/320 Thanks for the reply. R Boyer

  21. Sam on June 25, 2010 at 12:47 pm

    … what a ride! 🙂

  22. Lee F on June 25, 2010 at 1:02 pm

    For this spread trade you did how much cash it needs to have for the following senario? Thanks much, – Lee

    Difference between strikes is 2.
    2 x 5 spreads x 100 = $1000 minus $85 (credit) = $915, which is also the max loss.

  23. Steve on June 29, 2010 at 3:03 pm

    I just sold it @ $2.60.

  24. CT on June 29, 2010 at 3:35 pm

    Still in the demo CME trade hoping to get a bounce after a down day

  25. Russell Boyer on July 1, 2010 at 9:11 am

    Woops hit my stop for loss on 10 contracts will double up on 260/250 or if i can get .50 on 240/230 I may try that.

  26. Russell Boyer on July 1, 2010 at 9:22 am

    Sorry i want 250/240 at .50 or .60

  27. CT on July 1, 2010 at 9:27 am

    I am stopped out CME.I Learned to pull the plug at 15% waited to almost 25% loss In demo of course.I am learning.

  28. John on July 1, 2010 at 9:29 am

    I am glad I papertraded, down 61% today.

    • Genius on July 1, 2010 at 10:16 am

      I am glad you papertraded as well. This sucker dropped as soon as we got in.

      What I did was roll the puts to 240/230 and added a call credit spread at 300/310 to limit some of the damage.

  29. John on July 1, 2010 at 4:29 pm

    Genius. How much credit did you get on those two credit spreads? Are they both for July?

  30. Bull on July 2, 2010 at 11:59 pm

    How to make adjustment and convert it into profit?

  31. CT on July 6, 2010 at 2:14 pm

    Genius sure wish I had known you would give us a adjustment play. I would kept the paper trade on just to see how and adjustment played out. Anyway I learned a lot I am almost sold on selling options.

  32. Steve on July 16, 2010 at 3:25 pm

    Bought on 6/29 @ 2.60
    Thu close = 276.35
    Breakeven = 277.43
    MaxProfit > 280

    If today had been an up day, might have had max profit. Instead, I let it ride.

    Expired @ 10.4
    Loss = 7.8

    Don’t forget your stoploss orders!

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