The SPX Spread Trader- A monthly return of over 37% with SPX Weekly Options*
This is a unique strategy designed especially for those who are unable to watch the market every moment of the trading day. Simply place one order to enter the trade, and then wait till the close of trading.
This strategy involves opening a vertical credit spread on expiration day with SPX (S&P 500) weekly options. This means selling an option at one strike and purchasing an option at another strike price. The goal of a vertical credit spread is for both option contracts to expire worthless, and thus you keep the credit gained when you opened the spread. This is a great approach for those that prefer a higher win percentage in their trading and don’t want to be tied to watching the market all day.
What is a Credit Spread?
A credit spread where we sell an option at one strike and simultaneously buy an option at another. The way we use this in the SPX Spread Trader is to use a 5 pt spread between the 2 strike prices. So if we are selling a 2480 call we are purchasing a 2485 call at the same time. By entering these two trades as a single credit spread order, there is only a single commission cost. The difference in prices between these two options provides a net credit to your account. The beauty of this approach, is that there is no price movement in the SPX required to be profitable. SPX can go flat or have little movement at all, and our trade will still be profitable. All we need is for the SPX to close below 2480 (in this example), and both options will expire worthless and we retain the credit.
The maximum loss per SPX credit spread is determined by taking the credit and subtracting it from the margin requirement per contract. So for example if we receive a 1.00 credit, the maximum loss per contract is $400 (not including commission cost). On SPX options there is a $500 margin requirement per contract. But even if the market moves against us, the loss is most often less than the maximum. Depending upon the day and the spread, we are normally looking for at least a .95 credit. Normally, we get about a 1.20 credit or more per contract. The key to this approach is the accuracy of our forecasts. We have an over 67% accuracy with this approach. At that ratio we make money by simply staying consistent in our trading.
This approach is not for everyone as you must have the proper option trading level approval in your account and be comfortable with purchasing vertical credit spreads. This is a more advanced option strategy and is not suitable for all traders. While the profit is limited on each trade, so is the loss. Each trader must understand how to trade credit spreads and the risks involved before considering trading. You should consult your broker for any questions regarding the mechanics of placing such a trade on your broker’s platform.
3 Trades per week
We normally only do these trades on Monday, Wednesday and Friday as we only trade on expiration day. Historically we’ve seen over 37% ROM (return on margin) per month with this approach. When calculating % returns on credit spreads normally traders look at Return on Margin. The return on investment is actually higher, but due to the margin requirements for each trade we use that figure. This approach has proven a great way to build one’s account especially for those unable to watch the market throughout the day. Of course past performance is never a guarantee of future results. But we’ve found this a nice way to supplement one’s trading profits and do so with little stress or strain. At times we will exit our position early as mentioned below. So a trader should always set alerts at key levels to be aware of market moves throughout the day, even if you are not able to watch it every tick.
We normally enter our credit Spread at 9:35 am EST. We send out an email and post the trade details on our website. The information is simple and easy to follow. Here is an example of what our entry alert looks like:
Open SPX Vertical Credit Spread
Sell to Open .spxw170901c2480 (SPX weekly option: call, strike 2480 expiration 09/01/17 )
Buy to Open spxw170901c2485 (SPX weekly option: call, strike 2485 expiration 09/01/17 )
For a minimum credit of .65
If we are unable to enter the trade at the minimum credit desired before 10:30 am EST, we will cancel the order and there will be no trade for the day. Once we enter the trade, we normally wait till the close of trading, with the goal being that all options expire worthless and then we keep the credit made in our account. There are times we will exit the trade early, and we share those conditions in our Daily Outlook. But most of the time we prefer to wait and let the power of time decay work in our favor. A great approach for both volatile markets and during flat periods as the only thing required to make money on this type of trade, is that the market closes above or below that key level. Over 67% accuracy in our forecasts has made this a very profitable and consistent way to produce results.
That’s it…now you have all the information needed to trade as we are trading.
How it works:
Here is an example of how we use this information in our trading. Using the above alert this is how we traded. We purchased a 2480/2485 Credit spread. When we entered our order we experienced a better fill than our limit (as we normally do) and we received a 1.07 credit. Which means we gained $107 for each contract. Then we simply waited for the market to close. If the SPX closed below 2480, we would make the full profit potential in our spread. If it closed between 2480-2485 our profit or loss would vary, and if it closed above 2485 we would have a loss of $393 per contract.
The market danced around all day, and closed at 2479 so both options expired worthless, just as we wanted and so we made the full profit of $107 per contract or +21% ROM. Not a bad day’s return for making one transaction early in the morning and then simply waiting. When we forecast a down day, we are buying and selling calls and when we forecast an up day we are buying and selling puts. If you have never traded a spread, it may sound confusing, but it really is quite simple. We provide you with the strike prices and the minimum credit limit that we are wanting. You can seek to mirror what we are doing, or develop your own approach.
Easy to Follow
This approach began being offered to the public in September of 2017. Before that time we privately traded this approach. Past performance is never a guarantee of future results. But just imagine, if you could average that sort of return for only a few minutes of your time 3 days per week. Sign up today for a free trial and see if our service can be of benefit to you.
Most often we hold our position to the close, but there are times when we will exit the trade early. We share each day in our Daily Outlook if we plan to hold to the close or use our early exit guidelines. When we are using our early exit guidelines, we use this strategy in conjunction with our SPX Daily Outlook. If the market has broken target levels per our SPX Daily Outlook and then turns to take out the daily level, we will normally exit early. However, if this reversal through the daily level takes place within the last hour of the trading day, we may continue to hold to the close or give our position a bit more room before exiting, depending upon market conditions. The last hour can be volatile, and traders must adjust depending upon market conditions. So, a trader should always be aware of the key levels for the day. Also, if the market appears to be changing direction late in the day and we can lock in a profit in our Spread Trade, we will often exit our spread early. There are days exiting early has saved us money, and then days where we’ve given up some profit. Overall if a trader choose to hold every trade we’ve done to the close, they would have about a 30% average monthly return, instead of our 37%. So even if a trader cannot watch the market and exit early, the overall performance is still astounding!
No Trade Days
There are times when we believe it is better not to trade. This can be caused by a number of reasons. Sometimes market conditions are just too risky and so we won’t trade. Being a successful trader means sitting out of the market at times, and so we share when we are avoiding trading with our members. Also there are times where our desired credit cannot be obtained, and so we don’t trade on those days either.
Potentially double your account size in 2 years!
To help illustrate how powerful this strategy is, let’s use some real numbers. Let’s assume a trader starts with $10,000 in his account. This trader is comfortable with risk and so decides to risk 10% of his account in each trade. This would result in trading 2 spread contracts. Each SPX Spread uses $500 of margin per contract. The maximum risk per contract is determined by the credit gained. So, the maximum risk can be from $250 to $400 per contract. So, our trader is risking at most $800 per trade with 2 contracts. This trader does every credit spread for the entire year, normally 3 per week. At the end of the year at 37% average monthly return this trader would see about $4,440 in profit (depending upon commissions). That means the total account grew from $10,000 to $14,440 in just one year, a 44% annual return on the account! Now if the same trader then increased his lot size to 3 contracts for the next year, he would see a return of over $6,660 for the year. Now the account would be over $21,000. So, in 2 years only doing on average 3 trades per week, the total account has more than doubled in value!
When you look at it like this, you start to see the potential power of this strategy. Now, not every trade is profitable, and past performance is never a guarantee of future results. We do have draw-downs and losing trades, even losing months are a part of trading. But this strategy has proven to be a great way to build an account balance. Our SPX Spread Trader will show you each day how we are implementing this strategy.
Benefits of SPX Spread Trading
This style of trading has several benefits. There is no need to be tied to the computer all day. It doesn’t require any split-second decisions of when to hold or when to exit. The maximum potential gain and loss are known before entering the trade. It works in both flat and volatile markets, as movement is not required to be profitable.
Historically, if a trader were to hold every spread trade we’ve done to the close, and never exit early the average is about 7% less per month than what we’ve done. Which means this is a great approach for those that cannot watch the market all day long. Put on the trade first thing, and then don’t worry about it. Historically, that has returned over 30% ROM per month. Not a bad return for just a few minutes each week.
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*Historically we’ve seen over 37% ROM (return on margin) per month with this approach. When calculating % returns on credit spreads normally traders look at Return on Margin. The return on investment is actually higher, but due to the margin requirements for each trade we use that figure.