Welcome to another video lesson from NavigationTrading!
In this video, I want to show you how we’re able to take a losing Short Strangle and turn it into a winner. The trade that we're looking at, is on symbol XRT, which is the retail ETF. This is a trade that we put on November 21st of 2017. That's indicated by the little highlighted bubble. You can see on the chart every highlighted bubble is where we made another trade or adjustment throughout the period of time when we were in this trade.
We were in this trade from November 21st, 2017 and closed out of the trade completely on April 17th, 2018. We were in the trade for a decent amount of time. And the reason why, is because there was a massive move that happened in the ETF right after we put it on. A few days later, we had this huge pop higher. We added another trade and made some adjustments along the way. This thing went from about $41 all the way up to $49, before coming down and then starting to consolidate. This is a huge lesson to understand how to manage a trade when it goes against you. Not every trade is going to be one of those that you just put on and take off as a winner. You've got to know how to manage these trades from beginning to end. Knowing how to manage and adjust the trade mechanically and properly is the difference between a losing trader and a winning trader.
I'm going to go through this from beginning to end. If you're a brand new trader and you've never made an adjustment or you haven't traded a short strangle, you may want to come back to this tutorial when you're a little bit more experienced, because we’re going to get in the weeds a little bit on this. But for those of you who are trading strangles, short strangles, and are a bit confused on why we adjust the way that we do, or how to adjust, and you want to see the big picture of how we turn a losing trade into a winner, then make sure you watch this entire tutorial.
Let’s jump in!
First off, you’ll want to go into our Member’s area at NavigationTrading.com. Under the closed trade section, you’ll see a full list of our closed trades. Every trade is documented from beginning to end. We simply copy and paste these directly from our broker onto the platform. This way you can always see what we’ve been doing along the way. Under XRT, you can see that we started on 11/21/17 and ended up closing out of the entire position on 4/17/18, for a total profit of $307. Now, you might be thinking, "Big deal. $307? And you're in the trade for months? How is this a good thing?"
The reason it's such a powerful thing, is the fact that when we first put on the trade, the ETF completely went against us. It exploded to the upside like I show in the chart. It made a huge move to the upside, a huge one directional move. Remember, when we're putting on strangles, we like price to stay in a fairly consistent range to make money on that trade. But if you have a massive move, that's when you've got to learn to adjust and manage that trade.
From the beginning, we ended up entering a short strangle with four contracts. And then, what we did on 12/4, after we had a huge move, is just like we teach in our Strangles Course, we added another Strangle. We did this one for three contracts. Now we had two separate positions. Because we had this big move up on 12/20, we rolled our puts up (when we have a breach of our short strike to the upside, we roll up the untested sides). So, we rolled our puts up to collect more credit and to continue to give ourselves more time to be right.
Then we did an adjusting close where we bought back the three contract strangle, and booked a profit on that piece. We sold it for $70, and bought it back for $35. So that's a 50% of max profit on that piece of the trade.
Then the next day, we ended up opening another one. So, we sold another strangle for three contracts. We're constantly opening trades, booking trades, adjusting and rolling as needed until we get back to profitability. If we had just put on this one trade, and then the trade went against us and we took it off, we would have ended up booking a loss of about $600. We went from a $600 loss back to a $300 profit. (:
One of the key things to remember is where implied volatility is the whole time during the trade. When we put this on, the IV percentile was at about 60. And then it popped up and it stayed relatively high all the way through the trade. So, if we weren't already in this trade to begin with, anywhere along this timeframe you could put a trade on because we had high implied volatility. Meaning, the options were expensive, which is a good time to sell those options.
We rolled this trade from January to February as you can see from the chart.
Then on 1/24, we made another adjustment roll, where we rolled from February to March.
On 1/31, we did another adjusting roll where we went from February to March as well. So again, we're managing these two different positions. One had four contracts, the other had three. And sometimes I'll do that on purpose so that we have just one contract difference, which is easier to track. I like to track each trade within the position separately just to keep everything straight.
On 2/15, we bought back the Strangle with 4 contracts for $502, so it ended up actually taking a loss, but continued to manage our Strangle with three contracts.
On 3/29, we opened another Strangle with four contracts to continue to manage these.
On 4/2, we did another roll where we rolled from April to May, as you can see from the chart.
On 4/13, we did an adjustment close, where we bought back that Strangle.
Then on 4/17, we bought back our other Strangle and closed the entire thing out for a total profit of $307.
All of these adjustment techniques we go through step by step in our course. If one of the sides of our strangles gets tested, we roll up the untested side. Once we get down to around 21 days to expiration, we roll out to the next expiration cycle to collect more credit and give ourselves more time to be right. After all of those adjustments, one of the questions you might have is, "Well, how did you come up with the total profit? Can you walk us through how to calculate the profit, so that we understand what we made on the total trade from beginning to end?"
I've put together a really simple spreadsheet, because this literally is all you have to do to calculate the profit. It might sound complicated at first and when you're first learning how to trade these strategies, it can be complicated.
In the first column, I’ve labeled our trade, XRT. I’ve made a second and third column, one with three contracts, the other with four contracts. If you're trading with a multiple number of contracts and you have a couple different positions going on, you want to make a column for each of those depending on the number of contracts.
Then, take the ones that you sell (because when you sell, you collect a credit) and enter that credit under its respective column. You can see in my spreadsheet, under the four contracts column, we sold for 83 cents.
You put 83 cents under the four contracts column.
Under the column with three contracts, we sold for 70 cents. We put 70 cents under the three contracts column.
Then we did an adjusting roll, where we again sold, so that’s a credit of 52 cents under our four contract column.
When you do a buy, that’s a debit. You would enter that in the spreadsheet as a negative number. So, under the three contract column, we have -0.35 cents.
You just go down the line and if you sell when you're doing a strangle, you do that as a credit. And if you buy, you enter that in as a debit. When we get to the end, we've closed it out. At this point, we add up all of our debits and credits.
On the three contracts column, we ended up with a positive $2.77. On the four contracts column, we actually were in the negative -$1.31.
Next, we break out our calculator, and we add these together. We take the total from the three contracts column, $2.77, and then multiply it by 100 (because each contract represents 100 shares), which comes to $277.
Then, you take that number and multiply it by how many contracts you traded, in our case three, which comes to $831. So, in all of the trades that we were making with three contracts, that adds up to a profit of $831.
You repeat the same process for the column with four contracts. Our total after we added our debits and credits, was -$1.31. We multiply by 100, which comes to -$131. Then multiply -$131 by four, which was our number of contracts, and that equals -$524. We lost $524 on the four contract trades. Then all you have to do is take your totals from each column and add those together, which comes to a total profit of $307.
This may sound like a foreign language, but I promise, as we’re going through this and doing one trade at a time, you begin to make sense of it. If we go back to the platform, we did one trade on 11/21. We did another on 12/4, and another trade a couple weeks later on 12/20. This is just progressive adjustments and rolls, and additions, and putting on trades and taking trades off. When you get to the end, all you have to do is add up all your credits and debits, figure out where you are from a profitability standpoint, and that's going to give you your total profit.
I hope you realize the power of this strategy. We took a big loser that went completely against us from the beginning, and by staying mechanical, continuing to collect more credits, extending duration by rolling, and giving ourselves more time to be right, we ended up turning a major losing trade into a profitable trade. We trade such high-probability trades, and with a lot of them, you’ll be able to put them on and take them off as a winner. But, when one goes against you, understanding how to mechanically roll and adjust, and do the strategies that we teach step by step in our course, it is going to make a huge difference in the profitability and consistency of your trading.
If you'd like to learn more about how we've taught over 10,000 members how to trade options for consistent income, just go to our site, NavigationTrading.com. Click on the big orange button, and we'll give you immediate access to our flagship course, "Trading Options for Income." We'll also give you the NavigationTrading Implied Volatility Indicator that you see on our charts, along with the watch list that we use to trade the most profitable symbols day in and day out. All of this is yours, no cost, just go to our site: NavigationTrading.com.
We look forward to seeing you on the inside!
-The NavigationTrading Team