A Weekly Options Strategy that Makes 17.6% in 11 Days

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.
12-3-14 #2
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.

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