Scott Welsh | A Simple Options Strategy on SPY

04 Dec A Simple Options Strategy on SPY

Posted at 23:00h in Trading Blog by Scott Welsh

A Simple Options Strategy on SPY

Dec. 4, 2022

This week we’re looking at a simple options strategy because so many of you showed interest in options.

And a smart reader brought up a very important point regarding our last Newsletter.

On the list of QQQ trades, we know the 50% is based on the total credit received. What does the 100% mean? Is it 100% of the credit or is it 100% of the max loss? Because they’re different numbers.

Man, options are confusing.

So, I did the QQQ trades over again (and corrected a few typos after firing my editor) and this time the stopout equals 150% of the total credit. So, if the credit on the spread is, say, $100, then the stoploss is $150.

That still seems muddled but here is the corrected list of manual trades taken on ThinkorSwim for QQQ:

Date: 1/21/21 QQQ 310/309 Spread; RESULT +50%
Date: 4/26/21 QQQ 325/324 Spread; RESULT +50%
Date: 7/23/21 QQQ 354/353 Spread; RESULT +50%
Date: 10/19/21 QQQ 361/360 Spread; RESULT +50%
Date: 3/24/22 QQQ 340/339 Spread; RESULT -150%
Date: 7/22/22 QQQ 285/280 Spread; RESULT +50%

The high win rate still produced a hypothetical 100% gain if you add them all up.

Let’s see if SPY does similarly. (By the way, why use ETFs? We’re going that because they’re extremely liquid and have any strike price we need. Yes, they’re more expensive, but that’s the tradeoff.)

Once again, here’s the foundation for the strategy.

If we trade breakouts above a Keltner Channel (length 20; ATRs 1.5) and hold them for a timed exit, it’s nicely profitable over the long-term.

And we’re again selling Put Credit Spreads because spreads have a higher win probability than buying a Call (but a lower payoff because spreads are capped; you can only win so much on a credit spread).

When SPY closes above the Keltner Channel, we’ll sell a Put Credit Spread with a win probability of about 70%.

Remember, I’m manually using ThinkorSwim’s lookback tester. It only calculates end of day totals and I have no idea how reliable the data is.

Like QQQ, here are all the possible trades from 2021-now.

I’m taking profit at 50% of my total credit. I’m losing 150% of my credit if price goes the wrong way.

Last, I’m using 90 days until expiration again (or the expiration that’s closest to that number).

Here’s the testing on SPY (risking the same percentage amount each time).

Date: 1/8/21 SPY 380/379 Spread; RESULT +50%
Date: 4/5/21 SPY 390/389 Spread; RESULT +50%
Date: 6/29/21 SPY 413/412 Spread; RESULT +50%
Date: 10/18/21 SPY 430/429 Spread; RESULT +50%
Date: 3/25/22 SPY 435/434 Spread; RESULT -150%
Date: 7/21/22 SPY 380/379 Spread; RESULT +50%

Overall, that’s +100% of gains with this simple strategy.

Not too bad (though it’s a very small sample size). And it has a high win percentage while using a system we already know works on stocks.

But the win rate would have to remain high for this strategy to work long-term. That could be a problem.

However, this system is hoping for roughly a 70% win rate and taking an early 50% profit (instead of 100%) should bring that win rate up even higher.

Like I said, it’s interesting.

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.