P (Pandora) weekly spread trade setup

Yesterday the net credit on the 25/20 November 22 put credit spread was 40 cents if I just hit the bid and asks, I could probably get slightly better by going for the mid price which would be 50 cents. With options that are trading in penny spreads the mid price would be 41 cents. I also might have got a bit better a day or two ago.

Yesterday, with options expiry today, the same credit spread last traded for 13 cents which is a 27 cent profit (67.5% of the expected profit). If it wasn't expiring today I might have chosen to close the trade out but in this case I can make 100% of the expected profit just by waiting a day and incur no commission costs. The price would have to move over 17% down to cause the trade to lose enough to only break even.

Today the price is up so the play panned out.

The IV rank is now up to 85 so I will be looking at the next week's options if the price drops enough to bring the option pricing high enough to get another spread trade. I am not comfortable enough to consider going to December options without a substantial move down in the price first.

I try not to speculate on where something like this might go, but it's hard not to... so here goes.... assume that there is at least one trade setup available per week. With a little homework that is not too much of a stretch.

With the weekly option trades that set up like this the returns are quite robust. This trade was an 11.1% return on capital risked over three days. Extrapolating that out to an annualized return as if it were a 7 day trade (this can be done once per week as there is usually something setting up somewhere to turn this out weekly) results in over a 500% annual simple return based on the capital risked. That's 360 into over $2,000 in a year without adding more positions than just one contract.

Playing with the numbers for a moment and assuming that the trade are all successful, which, given the setup and odds is possible (with a 10% lower strike and a 5 trading day duration the odds brush 90% successful) . The starting $360 making a $40 profit per week would double in 9 weeks, Adding this $720 as the new total risk and turning out $80 per week and repeating this every 9 weeks yields $10,800 in just less than a year, or 3100%. Of course this ignores commissions, possible losses and draw downs and a lot of reality.

I wouldn't recommend using all the profits in the next trades on the same underlying stock as that amounts to gambling as the entire capital is at risk on the first day after doubling the position size. A better way to increase the profit is to widen the spread from $5 to $6 to bump the profit amount or set up other simultaneous trades in other options. More smaller trades are better than less larger ones.

Jeff.