The 3Dimensional Trading Breakthrough

Brian Schad
Nine days after initiating this position (“Start Day + 9”), Dec Wheat ends its
downward momentum at a price of $3.14½, at which time the momentum is now
up. To revert back to an “unlimited profit potential, limited risk” trading profile, I
will buy back the short Dec Wheat 330 call option “at market” (when the market
realizes $3.14½). If the call option I sold for 9½¢ is now worth 5½¢, and I buy it
back for that price, then I realize a 4¢ closed profit (9½¢ - 5½¢). If my original
overall risk was 16¾¢, and I have taken a closed profit of 4¢, my overall risk is now
reduced to 12¾¢ (16¾¢ - 4¢).
Example:
Date
Futures
Option 1
(Original
Insurance)
Option 2
(Short/
Covered
Option)
Overall
Position
Risk
Current
Profit/Loss
Start Date
“SD”
Bought
Long @
$3.11¼
Purchased
310 put for
15½¢
N/A
16¾¢
[$837.50]
N/A
SD + 5
$3.21/bu.
Purchased
310 put
for 15½¢
Sold 330
call
for 9½¢
7¼¢
[$362.50]
8¾¢
$437.50
SD + 9
$3.14½
Purchased
310 put
for 15½¢
Buy back
330 call
for 5½¢
12¾¢
[$637.50]
3¼¢
$162.50
In the example, we initiated a position with a 16¾¢ overall risk (for three months of
“insurance”), and of course no profit. We end the example nine trading days later
with a 12¾¢ overall risk and 3¼¢ open profit. This may seem insignificant at first
glance, but this profit was made within a matter of days resulting in an almost
25% reduction in overall position risk. A cycle of downward momentum could last
as long as one to three trading days (for an average short-term trading cycle), to as
long as six to nine days (for the longer-term). I can take a position approximately
three months out, and realize up to a 25% reduction in overall risk by selling, then
buying back, the short options. Just think of how many cycles there will be in three
months time!?
Okay, that sounds like hype! However, in the above example, there are two
completed cycles and the start of a third. Every time the momentum shifts
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