I’m sure you are reading this with skeptical eyes. How can someone be wrong, but still make money? While it does not make sense on the surface, I want to illustrate how this concept is actually a very real “thing” that exists in the market.
In order to prove this is a “real” concept that exists in the market, I am going to use one of my personal trades as the case study. Believe it or not…
I was wrong about the direction a stock price would move in, but I still had a profitable trade.
Again you may be scratching your head wondering how this is possible. Let me explain using a single word: time.
Time – The Great Equalizer
When I say “time”, I mean it in its literal sense. A better way to look at it is within the context of a sporting event or game. You may ask “how much time is left in the game?” This is the way time can be used within the world of financial markets.
Now, promise me you won’t go running off when I use these next few words – ok? I assure you things aren’t nearly as bad as perhaps you’ve been lead to believe. Using advanced option strategies are the key to unlocking the power of time.
The “power of time” may sound a bit dramatic, but as we go through this past trade of mine, I’m confident you’ll agree with me that I am not being overly dramatic.
The Trade Set-Up
I do want to quickly note. The point of this is not to explain the details of the advanced trading strategy. I will be making broad recaps in order to just illustrate what is going on for the overall trade. I’m not looking to confuse anyone, so like I said above, you have no need to be worried. This will all make sense.
I entered into the trade by shorting Amazon.com Inc. (AMZN) at $1.07. Looking at the image below you may be wondering, how this is possible. $AMZN was trading for over $450 – how did I “get involved” at $1.07? This is example #1 of how options are powerful and worth learning!
For newer traders, “shorting” means I will make money if the price goes down. As you see above, the price did indeed go in my favor. I entered the trade at $1.07 and within two hours, I was able to exit the trade at $.55, giving me a profit of $260. The details of the trade can be seen below (if you would like to see a bigger view, just click the image).
Let’s Play the “What If” Game
While I personally exited the trade, let’s pretend I had not exited. $AMZN earnings were this particular day after the bell, so I knew price action would probably get crazy. The key number to remember is that I shorted when the price of $AMZN was right around $482. This is also where the close occurred. To ensure we are all on the same page of understanding, I was bearish on $AMZN price action, so that is why I shorted (make money when price goes down).
Well… check out where the price opened the next day after earnings were announced.
No. You do not need to go to the eye doctor. $AMZN gapped up the next day and opened at $578.95, almost a $100 move in the bullish direction, wow! At the closing bell, $AMZN pulled back some, but still closed at $529.42!
Do you know what though? Had I still been in, it would have been a $535 win for me. At the surface it does not make sense. I shorted when the price of AMZN shares were at $482, and it closed at $529, so how could that possibly be a winning trade?!?!?!
There are two numbers to keep in mind. First, $575 and second “1 day remaining” (aka time). In other words, AMZN had 1 day to close above $575.
Because of this time factor, the options on AMZN simply “ran out of time” (picture in your mind the game clock of a sporting event hitting zero). So, even though I was terribly wrong on the direction of the price, thanks to putting time in my favor and the game clock hitting zero, I would have still had a winning trade.
No Black Magic Involved: Put Time on Your Side
I assure you, this type of situation in the markets happens all the time with traders who deploy option strategies. Traders can be wrong on price direction, but due to structuring plans where time is their friend, they can still come out ahead. The good news is, these types of strategies are available to everyone. Sure, you’ll need to put in some time and effort to educate yourself and learn, but allowing for the power of time to help you profit is something you can do.
If any of this has intrigued you to the point of wanting to learn more and widen your flexibility as a trader, then I’d love to be your teacher and mentor. I offer two options courses. If you are brand new to options, don’t be intimidated by them. I promise I can simplify them with my beginner course, Options Trading Simplified. If you already understand the basics of options, but want to learn more about some of the advance strategies, you can do so with this video course: Advanced Options Trading Strategies Explained, you’ll receive access to both of these courses and many more by joining the Trading Freedom Pathway. If you choose not to use my services to learn more, that’s totally cool. As long as I have opened your eyes to the flexibility and freedom that options can bring to you (thanks to time itself), then my mission is complete with this article.
Please let me know if you have any questions. I’m here to help.