Trading index options is like a game of chess. There are many choices to make in a chess game based on what you want to accomplish, but, in many cases, more importantly, on what your opponent does. The best chess players are able to look multiple moves ahead in determining the possible action and reactions to these moves. The first moves, in many cases, are relatively standard. It’s the subsequent moves in the middle game  that set up the strategy to take control and ultimately come in for the kill in the end game.
 
In trading index options, the first move is based on a variety of fundamental and technical analytics. There are a vast array of fundamental and technical tools that have proven some consistency in predicting future outcomes, however, in the end, one must rely on personal judgment in choosing a strike, month and strategy.
 
Ultimately, the subsequent moves based on market movement or lack thereof, will make or break the strategy and either allow for the retention of all or most of the premium sold, or, the unfortunate, rollover to another month, year, decade!!  In this case, index options are preferable, as they truly can be rolled over indefinitely, if you have the stomach and margin for the roll.
 
Wouldn’t it be wonderful if the middle game just consisted of watching paint dry and the end game of expiration would be sitting back and enjoying ones profits. More often than not, some form of reaction is necessary to keep the strategy profitable. However, sometimes, it is best to let that strategy go and move on to a higher or lower strike when the market moves significantly higher as it did in the end of February.
 
However, February, even with it’s 160 point intra month moves, proved to be extremely profitable.
The following trades are real trades that were executed over a 3 month period with February options.
 
STRATEGY ONE
 
12/11/2015 Initiated 1850 iron butterfly (IB) for 90 credit.
 
My current positions were : Long 1 1750 put (p) Short 1 1850 p Short 1 1850 call (c) Long 1 1950 c
 
Subsequently, 1/4/2016 ratio roll 1 short 1850 p to 2 short  1745 p for even money. With the market going lower, I was more comfortable short the 1745 strike on a fundamental and technical basis. 1740 was the intra day low put in in February 2014 and should hold, as support, at least until they had to be rolled again!
 
1/4/2016  Ratio roll BUY 1 LONG 1940 c- SELL 2  SHORT 2010 c for even money. This was setting up coverage for the next roll.
 
1/5/2016 Ratio roll CLOSE 1 SHORT 1850 c- OPRN 3 SHORT 1955 c for even money. I was losing faith in the 1850 straddle working. No longer had the put risk and while the market was falling, it seemed to be range trading in the mid 1900 range. I saw the opportunity to roll the 1850 c up for even money and, trepidaciously, acted upon it.
 
My current adjusted position :
 
Short 2 Feb 1745 p. Long 1 Feb 1940, Long 1 Feb 1950 c, Short 2 Feb 1955 c. Short 2 Feb 2010 c. At this point a strategy that had only been risking $1000.00 became an unlimited risk strategy. However, remember I had a $9,000 cushion in my pocket. Risk was now below 1745 and above 2010.
 
1/14/2016 Ratio roll BUY LONG 2 2015 c, Sell SHORT 4 2040 c.
 
1/25/16   Close 2 2040 short c for 1.5.
 
2/1/2016 Close 2 short 1745 p for 2.1. I always like to close cheap OTM options because I have been bitten in the butt before assuming, “Oh, it’s not going there.”
 
In the end, after commissions, this strategy pocketed $8200  for a two months time frame!!
 
As an aside, if there had been no adjustment or middle game, the profit would have been $2,900. Still profitable, but significantly less. The ultimate risk in between was below 1740 on the put side and above 2040 on the call side.
 
STRATEGY TWO
 
12/11/2015 Sold the same Feb IB as in strategy one but with a different adjustment twist.
 
1/4/2016  same ratio rolls as in strategy one for puts and calls. 
 
On 1/5/2016 I mistakenly did not take advantage of rolling the short 1850 and as the market continued lower, did the following rolls instead.
 
1/12/2016 ratio roll BUY LONG 1 1880c SELL SHORT 2 1945 c for even money.
 
1/19/2016 ratio roll BUY TO CLOSE 1 1850c  SELL SHORT 2  1910 for even money.
 
My current adjusted position:
 
Short 2 Feb 1745 p. Long 1 Feb 1880c. Short 2 Feb 1910c. Long 1 Feb 1940c.  Long 1 Feb 1950c. Short 2 Feb 1955 c.  Risk was below 1745 and above 1955, again with $9,000 profit as a buffer.
 
2/1/2016 Close 1745 p for 2.1
 
2/19/2016 Expiration
Sell 1 1880 c for 31.37 (3,129 after commission)
Buy 2 1910 c for 1.37 (282.00)
 
Total profit $11,300 !!!
Again the profit would have been significantly less, $2,900 without adjustments.
 
STRATEGY THREE
 
 December 2015, Sold Feb  2000 Iron Butterfly for 90 credit
 
Long 1 1900 p Short 1 2000p Short 1 2000c Long 1 2100 c
 
Buy ½ ratio spread 1900-/1800 p even.
 
The put was eventually closed by rolling 1 2000p/2 1900 p for even money. Risk was 2 short 1800 p.
 
At expiration everything expired worthless leaving a $9,000 profit minus commission.
 
Without adjustments, the profit would have been $1,100.
 
STRATEGY FOUR
 
12/21/15  Initiated Feb p ratio spread
Bought 1 2000 p sold 2 1900 p for even money.
 
1/4/16  Did Feb ratio roll bought 1 1805 p sold 2 1725 p for even money.
 
My position now had no cost. Risk at 1725 on two p contracts and profit potential from 2000 to 1805 . Maximum profit potential was $10,000 at 1900.
 
At expiration this strategy produced a profit of $8,900.
 
As in the chess game, there were a multitude of strategies I could have initiated in December for February expiration that would have yielded a variety of results. During December-February there were also a vast amount of adjustments I could have made because I didn’t like the way paint was drying! In the end, the perfect February strike would have been to sell the 1910 IB, although strategy four worked out great with minimal adjustments.
 
Admittedly, these worked out perfectly in a relatively volatile environment, however, the risk at any point in time was within controllable limits and the $9,000 premium originally taken in gave a nice cushion for playing around with.
Assuming just one of these trades for February were made in addition to the January IB trade I mentioned last week in a $200,000 account, profit for the year is currently around $15,000 or 7 1/2percent with an annualized profit potential of 90 percent. But, honestly, no one can expect to do this well everything month.  
 
Since February expiration, the market has taken a decided directional momentum to the upside.  The risk/reward is just not out there right now for neutral to down trading. Time to take a breather and enjoy ones profits until a more opportune time presents itself. A nice game of chess on the beach sounds like a great idea to clear my mind and give me some new ideas.
 

Marlene Sackman, Author