Our approach to SPX Weekly Options Trading
Here
Entry
We share in our Outlook a limit price for the option we plan to trade. This is the maximum price we are willing to pay for the option. However, we normally enter at a price well below that level. We are not waiting for that limit price to hit, we want to enter at a much lower price if we can. When it comes to entry, we normally wait until 9:35 am EST, and as long as the option is trading below our limit price we will enter the trade. The first 5 minutes are often volatile as things settle out, and so we normally wait to enter.
But there are times we enter earlier, if the market is moving fast in our direction. If it is moving fast and approaching our limit price, we will most often enter before 9:35 a.m. This ensures we are in the trade at or below our limit price. Sometimes, we will delay our entry until well after 9:35. If the market is heading in the opposite direction of our forecast, we will often delay entry until it turns. We prefer to use a a 1 min bar chart as a guideline of market direction. But, if the option has already run past our limit price shared in the newsletter by 9:35, and we weren’t able to enter, then we will wait. If it doesn’t come back to our limit by 10:00 AM, we will skip the trade. Also, if it runs so far that we would have exited the trade, if we had been in the trade, then we will skip the trade.
Exit
Once we are in a trade, we calculate our % profit target and % stops based upon what was shared in our newsletter. All % targets are based on actual entry price. For example, if we enter the option at 1.00 and we have a 100% profit target, our target will be 2.00 on the option. If we have a 60% stop, our stop will be at .40 on the option. Those % targets are rough guidelines that we use as we monitor our position throughout the day.
We are using our 3 target levels on the SPX along with our % profit targets and % stop loss when deciding when to exit the trade. Normally we will adjust our exits based upon the intraday movement of the SPX, in relation to our 3 price levels. Most often we employ a trailing stop once those key levels have been hit. Once a level is broke, it should act as support or resistance.
Our basic rule of thumb is to never let a trade that has come close to hitting the % profit target, turn into a losing trade. So depending upon the day, once the % profit is hit, we will move our stop to at least break even, and normally much tighter. If the SPX is going our way, we will let it run using the key levels as guidelines (please see our SPX Trader’s Blog for more articles on exit strategies). Once the first target level is broken we will often move our stop up to at least the daily target level, depending upon market conditions.
Order entry
We do not use Stop Limit or Stop Market orders. We personally do not place our stop orders ahead of time. When we refer to stop levels, these are simply levels we are watching. We only place an actual order when we are ready to exit the trade. Using Stop Limit orders can result in very poor fills, as there is often a large spread in SPX weekly options. Most often a trader can exit at a price in-between the bid and the ask. Now, every trader has different ways of placing their orders, but we suggest not placing stop limit orders ahead of time. Instead watch the market and when your stop price is hit, then place your exit order.
Trading is never easy, and each trader must make their own decisions on entry and exits, based upon their own risk tolerance and profit targets.
No Trade Days
There are times when we believe it is better not to trade. This can be caused by a number of reasons. If the option prices are too expensive at the open, we won’t trade. 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. So, we share when we are avoiding trading with our members. There are also rare days when we won’t make a market forecast. For example on 1/2 trading days, or often on abbreviated trading weeks. Those types of days have proven to be extra difficult to forecast with accuracy, and so we won’t make a forecast or trade on those days.
We share the above information, to simply give an example of how you might be able to use our newsletter to your greatest advantage. For specific examples, please read through our SPX Trader’s Blog for more information on how to follow our trades as we recap each day’s trading activity.
A few articles you may find helpful:
The Importance of Target Levels
Now that you’ve read the general guidelines, please be sure and read our specific trading guidelines.
If you have any questions please contact us.