Trade Dissection: Ratio Combination Write

The last time I talked about option writing, I explained how it worked by going over a recent trade of mine.

It was almost a picture perfect example of how a put option writing strategy should work.

At the end, I said that I'd be back to review another trade just like it when it was over.

So here we are.

This one is a good example because it shows how things work when things don't go perfectly. But that's what's so great. Things don't have to be perfect to make money.

So…

I wrote a ratio combination on Apple Computer (AAPL - Analyst Report) on May 13th (2009). At that time, AAPL was trading around $122.

The Trade:

• I wrote 1 Jun 120 put for a premium of 5.15 or $515
  
• I wrote 1 Jun 115 put for a premium of 4.10 or $410

• I wrote 1 Jun 130 call for a premium of 4.20 or $420

Combined, I stood to collect $1,345 on the trade if everything went right at expiration (i.e., AAPL stayed between $120 and $130), which was only about 4-5 weeks away.

As it turns out, the low of AAPL from that point was later on that day at $119.38, and it proceeded to move up from there.

My puts were never in jeopardy and started making money for me within a day.

My written call on the other hand started to work against me as AAPL started to rally.

About 2 weeks later, on May 27, AAPL was trading over $133, more than $10 higher than where I put the trade on.

My puts were doing great. But the call was now valued at 7.90 which translated into an open 'loss' of $370.

It looked like AAPL was headed higher, so I bought back the Jun 130 call for $7.90.

At that point, I lost 370 on that written call but it was looking increasingly likely that I'd keep 100% of the $925 premium I was expecting.

By expiration time on 6/19, AAPL was trading at 139.48, well above the $120 level, so those put options expired worthless, meaning I pocketed all the premium.

So the net result was not the $1,345 I had hoped for. But it was a gain of $555 (before commissions and fees). Not so bad for a 5-week wait.

And I have to tell you, these kinds of trades, for me at least, are some of the easiest and stress-less trades to put on.

In future articles, we'll also dissect some losers as well. (Hope I can find some. )

Dissecting losers is just as important as looking at winners because that's how you can correct mistakes and learn.

In the meantime, you can learn more about different types of option strategies by downloading our free options booklet: 3 Smart Ways to Make Money with Options (Two of Which You Probably Never Heard About). Just click here.