As a special service to my Strike Price readers (join here for free), I offer one interesting trade idea every few weeks…for educational purposes only and to throw some light on my process and strategies when trading options.
I say “for educational purposes only” because there will not be a follow-up on the trade. If you happen to take on the trade, remember that the key to keeping losses to a minimum is proper position-sizing. Most of the strategies I offer are risk-defined so you know at order entry how much is at risk. And knowing how much is at risk should give you a good idea what your position-size should be per trade.
How to Use My Weekly Options Strategy
Twelve days ago I presented a webinar focused entirely on my unique approach to bringing in income on a weekly basis using, yes, weekly options.
The following is a very good example of how I use “Weeklies”, so if you find that you are interested in the strategy make sure you check out the presentation. The presentation goes into far greater depth on how I use weekly options as an income-based options strategy.
But first, let’s examine how a weekly options trade works using my approach.
Several weeks ago the overall market, more specifically the S&P 500 as seen through the ETF SPY, was in a very overbought state according to my favorite mean-reversion indicator, the Relative Strength Index (RSI).
Once I saw confirmation of an overbought state in SPY, I immediately looked for a potential trade.
Above was the weekly options chain for SPY.
With SPY trading for roughly $207.50 and in a “very overbought” state, I wanted to use a strategy like a bear call spread. A bear call spread enables me to have a margin of error just in case the current directional trend, in this case a bullish trend, continues.
The next step was to choose the actual spread. I started my search for a high-probability spread in the Prob. OTM column. If I were to choose the strike price closest to 85%, I would need to sell the 210 strike. And since I only want to go out one strike wide I would need to buy the 211 strike.
Unfortunately, the 210/211 bear call spread would only bring in a natural premium (bid price – ask price) of $0.10. After commissions, $0.10 doesn’t allow for much of a gain.
So, the next step is to move further up the options chain to the 209.5 strike.
I can sell the 209.5/210.5 bear call spread for $0.15 ($0.34-$0.19). By selling the strike with a slightly lower probability of success I am able to make a return of 17.6% over the next 11 days. Again, the decision always rests with how much probability you want to have in your trade. In this case, we are going with a 79.09% probability of success.
But given the extreme overbought nature of SPY, I was comfortable with the 209.5/210.5 bear call trade — especially knowing that two of the 11 days were weekend days. So, in reality, I was only exposed to nine trading days.
I’ve been trading weekly options in my Options Advantage service since late February and so far I have had two losing trades. More importantly, the return on capital is over 70%.
I trade weekly options a bit differently than other options-based services. I do not make a trade every week. I wait for overbought/oversold extremes to enter the market and then I begin to look for a trade.
It’s a rational approach — an approach that follows simple laws of statistics. Again, if you are interested in learning more about how we use weekly options in the Options Advantage service, please click here.