How to trade weekly options on SPX
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Thank you. It was mentioned in the video that when the bull market ends, this strategy would likely stop working but I still get asked about it.
I also mention it in the email I send for those requesting the Presentation but figured I do. Pinned comment.
Thanks for your support.
I know this was about call spreads but I have a bull put spread question. Is the max risk for a bull put spread usually less than the losses from a stock price decline to the breakeven point? For example, if my spread breakeven point was $2 less than the current price, would the max risk be less than if I had a covered call and the stock moved down $2?
There’s a few variables that are hard to answer that question such as how far away from the money your spread is vs. how far your covered call strike is.
What I will say is that the amount of capital used would be way less with a spread vs. owning 100 shares of stock.
What I would consider is the wheel strategy of selling naked puts on stocks you want to own until you get assigned. Then sell covered calls until it gets called away. Then repeat. A few guys I know do this around dividend stocks so they collect the dividend while they own it.
Just some thoughts here since you’re used the selling covered calls.
You're not missing anything - it's the same trade - at the same strikes... the Bull Put would be preferable - as it can expire worthless.. saving you commissions - and - tighter bid/ask spread on entry. Volatility readings are irrelevant between the choice of the debit spread vs the credit spread.
Yes delta is the amount the value of the option will change when the underlying moves $1. It also correlated to being the probability of expiring in the money.
It isn’t exact of course but is pretty close. This why you’ll often hear traders discuss selling delta 20 credit spreads or something similar. Delta 20 is far out of the money implying a low probability it expires in the money.
Yes you would sell the 180 call and buy the 181 or 182 for protection making it a call credit spread aka bear call spread. If it stayed below 180, both options would become worthless and disappear from your account and you would keep the credit you sold it for.
+Vertical Spread Options Trading I believe I understand you correctly but let me use this as an example. I am using SPY, I don't believe that it will go above 180 by next Friday. would I sell a call spread or a put spread? Does that depend on my bias? And if I did that how would I determine what leg to buy and sell? so I did a 180 and 181?
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Two quick questions.
1) How come the average loss is $331 when spread's average buy price was $406? Shouldn't you make max gain if expires ITM and max loss if expires OTM?
2) Options stop trading at 4:00 PM. But stocks trade after hours which affect options prices too. What time exactly is the last second after which option prices don't move and I can know for sure if my spread ended up being ITM or OTM in the after hours trading on expiration day?
+Junaid Sohail 1. The reason is because these trades were based on Delta and some of them were 2 strikes wide but most were 1 strike wide. There may also be some trades that expired between the strikes so it’s not always max gain or max loss.
2. I would google SPX settlement for this question. Too much to post in the comments section.
You may need to shave off a little to get out ASAP. If you set the exit price though, many times you can filled but it may take a day or so.
With weekly options though, you’ll need to air less to get out right away. Hope that helps.
Unless I am missing something, you neglect to add to your analysis that if you leave the trade on and both strikes are in the money it's going to cost $30 for settlement fees. So your profit is now a net of $70, I use Think or Swim and the fees are $15 per leg.
There was a comment below that asked the question why not use Puts and there was no answer to the question.
If you utilize the same month but use the inverse deltas on Puts you can save yourself a ton of cash.
I don't disagree with the strategy it's just not well thought it the whole way through.
+Jeff Brown Good points. Most of these points have been discussed in the comments but I’ll discuss it again.
So TOS Is $15 per leg regardless of the # of contracts so if you’re trading 10 or so contracts it’s probably close in price to closing the trade.
One other thing not mentioned is the margin needed. Let’s say you wanted to allocate $5k to this strategy. For a single strike wide Call spread at $4 you could purchase 12 spreads. If you preferred to sell similar strikes put spreads you could only sell 10.
So you can save the costs on the put spreads but you’ll need more margin.
So theres something with capital efficiency that could probably explored more.
Thanks for the comment. This is a good discussion and helps others who may want to understand the differences.
As long as the market stays bullish, this and other bull strategies will continue to do well.
I use the 200 sma to determine bull market or not. With that said, I like spreads a little farther out than 7 days to give time to adjust.
Great video! Since there is no assignment risk on SPX, I can just let it expire or I can close it earlier if it hits my max profit, both cases are okay, right? Since both legs are ITM, I am guessing max profit won't be until expiration?
In bull call spreads, I make max profit when stock stays above both my strikes at expiration, variable profit if it is between the two strikes at expiration and max loss if it is below both the strikes at expiration. Is that right?
Hey. I could find this video you mentioned. Can you link me to it, please?
Also, this happened. I'm not sure why. I tested a SPX weekly bull call spread with 2850/2855. It was a 72 delta (if I'm remembering correctly). It did expire ITM, as you can see in the screenshot the mark is 2901. Instead of the $100 max gain I was supposed to make, I made a $500 loss (max loss was $400). I'm confused, what did I do wrong here?
This back test had no stop losses. Yes it took a trade every Friday and held to expiration and let the cash settled index settle itself.
Keep in mind this study was done prior to 2018 which has seen more volatility and I’d recommend waiting for short term sell offs for long trades than a taking a new trade every Friday.
I recently posted another bull call spread video about this but is geared toward monthly options. Hope that helps.
What a great video, thank you!
A question I have. Will this be a higher% win if we do it far in the money. Ex. At the time you made the video SPX was trading at 2421, what if we sell the 2355 call and buy the 2350 call (I do understand we need more capital). Does this means the probability of winning is higher since delta is higher as well? And will this be same winning % if done for 1 day, 3 days or 8 days?
Thanks Sergiu. So the probability of winning will get higher the deeper in the money however, when the losses come they will also be larger due to the there being more at risk per trade. There’s kind of a sliding scale.
Not sure what you’re asking for different days.
Hope that help.
Thank you so much for this video. It confirms once again that I should just stick to a system and go for it, non emotional. I tried this strategy for a few weeks now, but my problem is that I hardly ever get filled. Just today I still tried the 76/74 bull call spread but the spreads between bid (3.00) and ask (5.90) are simply too high. Any ideas on how to overcome this?
Thanks for your reply. What would you suggest the max. price is for this strategy? I checked selling a similar strike bull put spread indeed, but the bid (0.40) and ask (0.60) were too low in my opinion, especially since I normally have to underbid the bid price in order to get filled. What would be the minimum credit you would want to receive for this $5 spread?
http://bit.ly/2yfc2fn Here's the promo link for the CML Trade Machine Options Backtester used in this video. They've added a ton of new features for scans and alerts especially regarding earnings trades.
the call spread you are doing is cool, but the oposite short put spread, has the same risk-reward, but since it's out of the money, the bid ask difference is smaller. So you sell for 100 and you have 400 in risk. Or you buy for 400 and you have 400 in risk and your max profit is 100. Same thing, but the bid ask difference on out of money options is smaller. Easier to get filled, did you try that?
After losing $ day trading the last 6 months, I want to try options. I wouldn’t call this a “bull market”’exactly, as some weeks the market is down, some weeks up. Does this strategy work in today’s volitile market? Someone in a chat room I’m apart of only trades SPY options based on the HULL moving average. I’m not sure which strategy to use. This protects your downside via the spread, but I wonder how consistent it is in this market? What are your thoughts?
Yes the bull market definitely changed this year. Keep in mind this video and it’s backtesting was posted in 2017 when all was right with the world. Lol.
Anyways, to answer the question, I still like getting bullish on pull backs but personally I’ve switched to bull put spreads this year.
I’ve also posted some more recent research on SPY along the same lines so check those out.
Thanks for the comment. Eric.
Yes. Max profit at expiration if it closes above the short strike. Here’s a caveat though. If you hold into expiration, you will pay an exercise fee. Depending on your broker and the number of contracts, it may be better to close the day before instead of hold.
Hi Troy, so first thing is that I would position this as a full risk trade, meaning I really don't use a stop because the P/L can be volatile being it is so close to expiration. What do though to avoid max loss is to see where the price is trading the day or so before expiration then make a judgement call if I think it'll recover.
For example, if SPX pulls back and now both strikes are out of the money, I may just close the trade and take a partial loss. If price is trading at or near the short strike, I would close before expiration with a small gain or loss.
One thing I've been doing lately is waiting for a 2 or 3 day sell off before initiating this type of the trade. Then look at options expiring 7- 10 days out.
Hope that helps.
How is this any different from doing a put credit spread on the same strikes? i.e. you can sell the 2400 put and buy the 2395 put for a credit of $1.40, which is the same as buying the 2395 call and selling the 2400 call for a debit of $3.60. If the long call spread expires in the money, you make 5.00 - 3.60 = 1.40. In that case the short put spread also expires out of the money, you make $1.40 - 0 = $1.40. It is the same thing.
Actually the margin requirement would be 360 as well. There is no difference. Now the neat thing about using a bull put spread is you can hedge it for free if it moves against you. So you can sell a bear call with the same distance between the strikes with no additional margin costs.
You are right it’s about the same trade P/L wise. One small difference is the long spread takes up less capital. In your example $360. The credit spread would take up $500 in margin. So your profit percent gain based on capital needed would be higher with the long spread even though it would be about he same dollar wise.
The credit spread would also not have an exercise fee. For those just trading a few contracts the credit spread is probably better.
Thanks for the comment. Hope that helps.
All your videos are good information. I appreciate it. In this trading system, am I to assume that the 2 or 3 year back testing would give similar results as presented here in this video with the 1 year? Also, do you usually put this trade on on Fridays with the next Friday weekly option chain set to expire?
Delta 20 is the greek delta at the time of the trade and loosely translates as a probability of expiring in the oney. So a delta 20 be about a 20% chance the option expired in the money, or about an 80% chance it expires out of the money which is the goal of a credit spread.
+dmo1964 Thanks for the comment. Yes the past 1 year has been good for this trade. What I’ve been doing though as of late is waiting for a 2 day decline and then selling a put spread 7 - 10 days out. Some longer.
The reason being is that volatility has increased making put credit spreads more appealing.
It’s all the same concept though. Use Delta as a probability whether buying call spreads or selling put spreads.
Hope that helps.
Oops I was looking at double diagonals on spx on a different video, and I came across yours for trading spx option and was responding to a comment down below. I forgot I was at the wrong tab when I posted the last comment. I wasn't trying to discredit you. As a matter of fact this strategy seems to make 5x commission cost which is really good. Nice and a very simple yet effective strategy.
As in if it cost you 8.95 per trade x2 since your buying and selling this strategy it will net 5x that in returns vs cost of trade ( I'm not counting the debit cost) Anything above 3x return vs cost of trade (commissions) is really good.
What if your only options are around .80, then .70, then .60 - there are often not two deltas in the 70s for SPX, at least not that I can see right now. Checked every expiration date for the next 2 weeks and I get like 88/72/59 so there's only one that matches low/mid 70s delta.
In that case is it better to go with the 80/70 or the 70/60? Neither look great to me - for 10 contracts ToS is saying around -3.6k downside and +1.3k upside.
Great video, thanks for putting it up, but I just can't match up the advice to what I see in the data, please help =)
+HB Stone Thanks HB. So this back test focused on selling the call option in mid to low Delta 70s. If you sell higher like 79, the probability is higher but the the reward is lower.
The general idea is that the Delta is about the probability that the option will expire in the money. For this strategy, that would mean max profit. I understand the option chain won’t always have everything but there should be st least 1 or 2 call options in the 70s to consider. Hope that helps.
Double Calendar Spreads. Suppose the Call side debit is 3.18 and put side debit is 3.4, so my margin required will be the most money I can lose 3.4 * 100 i.e., 340 usd or it will be 3.18 + 3.4 = 6.58 *100 i.e., 658 usd?
Not a wise decision to do double diagonals (aka double calanders) ever on the spx. You will always lose money even if your within parameters of your strike zone. Calenders on spx has a significantly high pos vega and spx implied volatility will always fall. Personally spx is probably one of the most difficult to trade in.
If the strikes are deep ITM and when you say you had 6 or 9 losers, does it mean that the index (SPX) got hammered during those weeks and the deep ITM strikes became OTM. By expiration, if it moves down but strikes are still ITM, you will loose some but not completely. Correct?
If the SPX moved lower but both strikes were still ITM, you would make money at expiration although you'd likely be down in the trade for a while. You'll only lose money if SPX moved lower than the breakeven level which is typically just below the short strike. This depends on how much you purchased the spread for. Hope that helps.
+orkayen Good question. So if you’re trading in the money call spreads on regular equities you run the risk of getting exercised early or dividend risk. To avoid this , you could sell similar strike put spreads that will be out of the money to avoid that risk. Hope that helps. Thanks for the reply.
This was great, I've been looking for "home options trading" for a while now, and I think this has helped. Ever heard of - Winoorfa Option Olegroson - (just google it ) ? Ive heard some decent things about it and my friend got excellent results with it.
Agreed. With buying debit spreads, the goal is for both strikes to end up in the money at expiration which implies there is some kind of fee to close the trade. You either close it or they close it for you.
If you're only trading a couple spreads it's most likely cheaper to close the trade. If you're trading 10 or more spreads then getting exercised may be cheaper. Getting out of the trade will cost you if that's what you mean by there's a "catch". lol
PlushEnt4tLife when choosing the strikes, the sold strike needs to be about a Delta 75.
Doesn't have to be perfect but some where in the mid 70s.
Then the strike you buy just needs to be strike above the one you sold.
Hope that helps.
tawmoss1 Good point. The past few years we've still been in a bull market but have also had some sideways movement which this strategy works also.
For a bear market, you could simply switch to puts spreads with similar deltas. I've not backtested this but as option prices increase the delta/probability should adjust also.
Hope that helps. Thanks for the comment.
I could be wrong, but...your TOS order shows that the max you would make on this trade (if both legs close ITM) is $41 (excluding commission) -- see "Analyze" tab. And that's far from 20% return you've mentioned!
Hi Perso, If you purchase a $5 wide call spread for $4.10 and both strikes are in the money, the spread will be worth $5 at expiration. This would be a $0.90 gain which is about a 20% gain.
If you're trying to reproduce this in ToS, make sure you lock the price of $4.10 on the Analyze tab so the prices are the same. You should see the max gain at $0.90.
Let me know if that makes sense or if I'm missing something.
How can you tell you're dealing with a cash settled index? Will any index work like this whereby you don't need to settle at expiration to avoid assignment? Also, you said that we just let these expire. We don't buy or sell at expiration? Just do nothing if we're still in the money?
The two main cash settles indexes with liquid options are SPX and RUT. Most other ETFs like SPY, QQQ are settled using the underlying in which you could get assigned stock if you have in the money sold options.
Yes, if both are still in the money at expiration, you can let it expire and it gets settled in cash in your account. If they both expired out of the money, they would be worthless per usual. If it settles between then the cash difference of what you paid goes into or out of your account.
Like most spreads, if you got a big move in your direction and can collect most of the premium, it makes sense to close it early and wait for the next setup.
Side note: I think SPX has 3 expirations per week now, so in theory, you could trade this 3 times per week although I haven't tested that or traded it. Looking into it though.
Hope that helps.
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