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Editor's note: We're continuing master trader Jeff Clark's series on a unique options strategy he uses to trade his own money. He's been using it successfully for three decades now – and it's how many professional traders manage their own accounts. It's not for everyone... but it's worth taking the time to learn more about it.

Your Broker Will Pay You to Make These Trades

By Jeff Clark
Thursday, December 27, 2012

Yesterday, I walked you through a trade that paid my readers $30 or more to put it on... and ended up paying another $250 when they closed it out.  
The trade was set up to pay off if the stock went up... if it went nowhere... and even if it went down double digits. The only way to lose was if this dirt-cheap stock fell more than 25% from where it was when we opened the trade.  
In short, we were able to make money even if we were wrong.
Now... this kind of trading isn't something most folks have seen before. And most folks are reluctant to try something new. But once you get the hang of it, you'll see how it can dramatically increase your odds of trading success.
In my experience, the more examples you see of this strategy in action, the more your mind begins to recognize and process it automatically. So today, I'm going to walk you through another play I recommended... and show you step-by-step how it worked.  
Back in December 2008, I told my S&A Short Report readers about a fantastic trading setup in silver.
The metal itself was trading for $9.38 an ounce, and I had predicted a quick breakout up to $10.50 (and ultimately as high as $19). You could have bought silver outright, but my favorite way to take advantage of the coming rally in silver was through silver royalty company Silver Wheaton (NYSE: SLW).  
At the time, Silver Wheaton was trading around $3.10 a share. We could have simply bought a call option on Silver Wheaton. But in that case, we'd have lost if the stock went down... we'd have lost if the stock went nowhere... and we'd even have lost if the stock failed to rise as much as we expected.  
Instead, we set up a trade that would make money even if we were wrong... 
Here's how that looked, trading one contract at a time. (One option contract covers 100 shares.) 
Buy, to
Silver Wheaton
March $5 calls
Right to buy Silver
Wheaton at $5
Spend $75
Sell, to
Silver Wheaton
March $7.50 calls
Obligation to sell Silver
Wheaton at $7.50
Collect $55
Sell, to
Silver Wheaton
March $2.50 puts
Obligation to buy Silver
Wheaton at $2.50
Collect $60
Total net credit: $40
We created a trade that paid us $40 to set it up. That $40 was ours to keep no matter what happened to Silver Wheaton.  
This trade could have played out in one of four ways...
1. Silver Wheaton closed below $2.50 on March expiration day. We would have been obligated to buy 100 shares of Silver Wheaton at $2.50 per share. Figuring in the $40 we received for setting up the trade, we really agreed to spend $210 on 100 shares, or $2.10 per share. So this trade would have been profitable as long as Silver Wheaton held above $2.10 per share.
2. Silver Wheaton closed between $2.50 and $5 per share on March expiration day. All the options in the combination would have expired worthless, and we would have kept the $40 per contract.  
3. Silver Wheaton closed between $5 and $7.50 per share. The higher Silver Wheaton traded in that range, the more money we would have made. For every dollar Silver Wheaton rallied, we would have collected another $100 per contract.
4. Silver Wheaton closed above $7.50 per share. The trade would have been worth $250. So our maximum profit was $290 ($250 from the combination and $40 for the original setup of the trade).
In other words, the only way we could have lost money on this option combination was if Silver Wheaton dropped more than 30% from where it was when we opened the trade. We were going to make money in every other scenario.
Think about what we did here...
Instead of having a position that would have lost money if Silver Wheaton went down, stayed the same, or failed to move up enough over the next few months... we created a trade that was going to be profitable under every scenario where the stock didn't fall by more than 30%.
By February, shares of Silver Wheaton had soared to $6.70. That was a big gain in a short time, so we closed the trade for a net credit of $150 per contract. Counting the $40 we received for setting up the trade, we had a total gain of $190 per contact.
We got paid to make the trade... and we got paid even more to close it out. It's those types of results that attract the professional traders who use this strategy all the time...
In the next essay, I'll show you what types of trades this strategy is best suited for... and why it's even easier to monitor these positions than it is to monitor regular options trades.
Best regards and good trading, 
Jeff Clark

Further Reading:

Yesterday, Jeff walked Growth Stock Wire readers through a real-life trade that his subscribers got paid to set up. You can read it here. And catch up on Part I and Part II of this weeklong series here and here.

Market Notes
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