Wednesday, July 14, 2010

July Trade Update - Looking Good!

With three days left until July's option expiry the probability of our trade succeeding is now up to 99.5%! last week it was at 84% and two weeks ago when I placed the trade it was well above our 70% threshold starting off at 78.7%. Remember the profit on our trade this month is a 15.6% annualized return. This is a typical example of a how the Option Income System works by consistently producing low risk to high reward ratio trades that generate monthly cash flow!

Here's what the probability stats look like in my option probability calculator:

As a 'seller' of cash-secured Puts we have time on our side. From the moment we place our trade, time decay of the option contract is working for us. Each passing day it chips away at the contract lowering the price of our option so we could buy it back for less and take an early profit (of course the price movement of the underlying asset (GDX) moves the option price up and down as well). Time decay also improves the probability of our success if we let the option expire. Which with only 3 days left and these great odds we might as well let this puppy expire.

The image below illustrates what option time decay looks like. Notice that the curve is exponential so by trading just the last month of the option we capture the steepest drop in decay to work for us.

There's also an added benefit to letting the contract expire because you do not have to pay a closing commission cost! We'll be back all in cash next week to compound our profits into the next months high probability trade.

And here's what the GDX chart currently looks like:

As you can see we have a very nice margin of safety (4 points) above our $46 strike price. Now I realize that the odds are slim that GDX will close this Friday BELOW $46, but if is does what's the down side? Well our option contract will be assigned to us and we will end up owning shares of an excellent ETF of Gold Mining companies at a great price!

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