Almost daily, I’m asked about my method for trading weekly options.
I won’t get into the nitty gritty now; I’ll save that for my upcoming webinar (click here) where I have ample time to discuss my step-by-step approach.
What I would like to share with you today is an opportunity to make 19.7% in 12.8 days trading on the Nasdaq 100 (QQQ).
The tech-heavy NASDAQ has once again pushed into a short-term overbought state.
Once I see this type of confirmation, I immediately search for an opportunity to fade the current short-term trend. That’s because history tells us that when a short-term extreme hits, a short-term reprieve is right around the corner . . . it’s called mean-reversion . . . and it’s powerful.
“From financial history and from my own experience, I long ago concluded that regression to the mean is the most powerful law in financial physics: Periods of above-average performance are inevitably followed by below-average returns, and bad times inevitably set the stage for surprisingly good performance.” – Jason Zwieg
In our case, we would use an options strategy known as a bear call spread, or vertical call spread. A bear call spread works best when the market moves lower, but it also works in a flat to slightly higher market.
How do “weeklys” play a part in the strategy?
Remember, most of the traders using “weeklys” are speculators trying to essentially win a lottery ticket. They want to take a small investment and make exponential returns. Not us. Why? Because we understand the basics of probabilities.
Take a look at the options chain below.
I want to focus on the column titled ProbOTM, or probability out-of-the-money. In our case this is the percentage that QQQ will close below our chosen short strike of 146.5.
Knowing that QQQ currently trades for roughly $144.77, I can sell QQQ options with a probability of success in excess of 66% and bring in a return of roughly 49.9%. So again, if the underlying ETF, in this case, QQQ, stays our short strike of 146.5, we will make 49.9% return on the trade.
If I increase my probability of success I will bring in less premium, thereby creating a lower return. But, my probability can increase dramatically . . . upwards of 80% or more in some cases. It truly depends on how much risk you are willing to take. Again, I will be going over all of the intricacies of the weekly options strategy in the webinar tomorrow.
But I’m not aiming for a 49.9% return. Research shows that taking off spreads at roughly 50% of the original premium leads to far better results. Therefore, I want to take off the trade when our bear call spread is worth roughly $0.30, or half of the original premium of $0.63.
Weekly Options Webinar
I’m perfectly happy taking off the trade for 19.7%, especially when I know my average duration is12.8 days (including weekends) for my weekly options approach. I’ll be discussing this trade among others in the webinar tomorrow.
If you are interested in learning the intricacies of my step-by-step approach when trading weekly options, please sign up for my free webinar. You’ll not only learn how I trade weekly options, you will also learn a few other simple options strategies that use probabilities to your advantage.