An Easy Options Strategy that Crushed The Market

so over the long haul the stock market returns about 7% to buy and hold equity investors and that includes periods where you'll experience significant drawdown such as what happened during the Great Recession of 2008 where the market lost more than 50% of its value from its peak that's just an inadequate return for anyone interested in seriously increasing wealth and it certainly is an inadequate return for active traders but options income trading affords you an opportunity to do a whole lot better than that I'd like to show you just one example out of literally hundreds of strategies employed by options income traders who want to find a way to get past that world of insufficient returns that most traders are used to in the stock market the incredible thing about this strategy is that it's amazingly simple to execute and it just happened to beat the hell out of the market in the last two years what I want to do in this video is explain what this strategy is the logic behind it and how easy it is to implement so if you're interested in a strategy that would have returned 71 percent on your money during 2007 and 2018 while the market was up only twelve percent over that same 2-year period then stick around because I'm pretty sure you're gonna find this to be an eye-opener [Music] hi I'm Seth Freiburg and I'm the head trader of SMB capitals options trading desk SMB capital is a proprietary trading firm located in midtown Manhattan and we provide capital for options and equity traders from all over the world trading both remotely and in our offices here in New York City you'll want to click our subscribe button right now so that you don't miss any of our free trading videos produced for the trading and investing community now in this video we're going to be discussing an options trading strategy combined with a simple well known technical indicator and we'll be running through a powerful example of how it would have worked out over the last few years I'll take you step-by-step through the process of implementing this simple strategy and if you'd like to learn three real-world option strategies that our traders use including the surprisingly simple and powerful strategy that some of the greatest investors in the world like Warren Buffett use all the time plus an options trading strategy that has a statistical 80 percent probability of profit month in and month out plus an option strategy that you can employ with a stock that you like where you'll make your target profit whether the stock goes up goes nowhere or even goes down a small percentage then you should check out the free options class that we're currently running just go ahead and click the link that should be appearing now at the top right corner of your screen that will open the free registration page in a new window so don't worry you won't lose this video also you can visit options class.com to register for this free intensive workshop it's an extremely rare opportunity for retail traders and investors to learn directly from Wall Street traders but that's exactly what you'll be getting through this free online workshop so click the link to sign up now and don't miss it ok so let's start out with the basics if you've been around the financial markets at all you've probably heard of the 200-day moving average it's simply the average closing price of a stock or index over the last 200 days simple as that the 200-day moving average of the S&P 500 is a very widely used indicator of the strength of the stock market when the market falls below its 200-day moving average it tends to struggle for a while and sell off so if you're long stocks you'll find this to be a very troubling time if you're a buy an equity investor these periods can be really stressful so what we did was we designed a bullish option strategy that basically stays out of the market when the sp500 drops below its 200-day moving average yet is very conservatively positioned so that it will do well even if the market drops after you enter the trade and if it drops below it's moving average for more than a week or so we just don't enter their trade at that point we just move on to the next trade which we will initiate once the market moves above its 200-day moving average so by now you must be curious what this strategy actually is it's actually incredibly simple most people are familiar with options on stocks a call option gives you the right to buy a stock at a certain price even if the stock price is going way above this strike price of your call and a put option gives you the right to sell your shares at a certain price even if the stock price has dropped way below the strike price of the put but there's another kind of option called an index option which has one major different from stock options with index options you can get paid off in cash index options don't involve shares of stock at all with index options like options on the S&P 500 for example if you buy a put and the index goes below the strike price of that put for each option you own you are paid $100 for each point below that strike price that the index hits on the day that the put expires the opposite is true for index options or in calls if you buy an index call in the market rallies above the strike price if you call you get paid $100 for each point above your calls strike price now as a trader you can buy shares of stock but you can also short those shares similarly with options you can short options in other words sell them and then you get the premium at the option option buyers paying so for example if you sell an index put option but the index rallies above the strike price of your option then you get to just keep the premium from that put that you sold on the day that the option expires you have no further obligation okay so now that we've got that definition work out of the way here's how this simple strategy that I've been talking about works you put this trade on every month around the 10th of the month you're starting 70 days before the expiration date of the options that you're trading so the first thing you do is to check if the market is trading above the 200-day moving average so let's go back to November of 2016 and see where the 200-day moving average of the SPX the S&P 500 index was 70 days out from the January expiration of the options on the SPX as you can see on that day November 11th 2016 the market was trading at about 20 165 and the 200-day moving average is below 2100 so we have a green light to enter the trade the markets trading above the 200-day moving average so what we do next is simple now if any online broker that allows you to trade options the broker has models that estimate how much the price of an option will move when the asset it is derived from in this case the SPX moves one point those estimates are called deltas and every online broker will assign a delta to every option regardless of how close or far away that option is from where the index or stock is trading don't worry exactly how to use Delta's right now you can learn that another time the point is simply that the farther away an option is from the money the smaller its Delta is an option at the money has a delta of about 50 but if it's very far from where the index is trading it can have a delta of 10 or even less into the single digits in many cases you don't have to calculate this yourself your broker will calculate it for you you don't even need to fully understand what deltas are you just need to know which Delta is assigned to the options on your options chain and then you'll be ready to implement this strategy so in this case we find the closest to a 10 Delta put option for sbx which as you can see in this example is the SPX 2,000 put 70 days out for the January expiration and we sell that put for a price of 18 dollars and 10 cents times 100 so you get in eighteen hundred ten dollars in cash then for protection we slide fifty points lower on that though on the index 2 by the 1950 put for $13 times 100 were $1,300 this transaction selling the put and then protecting it with a put that we buy is called a put credit spread and in this case we received five hundred ten dollars for it because we sold the closer to the money two thousand put for eighteen hundred and ten dollars and bought the farther from the money nineteen fifty put for thirteen hundred dollars which leaves us with five hundred ten dollars now your broker will require you to have about forty five hundred dollars in your account to execute this trade so we consider that the capital utilized in this trade so basically if the market closes above two thousand on January 20th when the option expires then the two thousand put just expires and so does the one you bought at nineteen fifty because for either put to have value to the one who owns it the SPX would have to be trading for less than two thousand on the day it expires so if SP X is trading above that price it expires worthless in which case you just keep your five hundred ten dollars that you got for selling the put spread and the buyer of that put spread is holding something worthless and just lets it expire well as it happens the SPX traded up to 2250 On January 20th 2017 the expiration date of the put spread that we sold and the options just expired worthless so the trader would have just pocketed his five hundred ten dollars so the rules of the trade go like this around the 10th of every month you find the monthly options chain which is 70 days into the future and you sell the ten Delta put which can be hundreds of points below the market but sometimes closer unless the ten Delta put is above the 200-day moving average in that case you go right to the 200-day moving average and sell that put instead then you slide down 50 points from your short put and you buy the put which is fifty points lower the net you received from selling and buying those particular puts is what you get to keep at the market closes above the short put the one close to the money on the day of the expiration of the options the only exception is this if the market ever drops below the 200-day moving average for more than five trading days and it's time to start the trade you just skip that month if in the next month the market is above the 200-day moving average you initiate the trade so you'll skip some months and that's a good thing as I explained because this is basically a bullish trade and if the market is below the 200-day moving average there's a heightened chance that the market will become bearish which is not good for this trade now from a risk management standpoint and there will be losing months where the market sells also sells often you have to get out of the trader to loss the most you can let yourself lose your stop in other words is twice the cash you brought in for selling that particular put credit spreads so if you brought in $475 for a particular spread the worst loss you're allowed to take before you must hit out of the trade is 950 dollars and that's going to happen now and then all trading strategies have both winning and losing months now around the 10th of the next month we were ready to enter into the February trade so we looked at the options chain about 70 days out now this time the market had rallied up to 20 to 53 and the 200-day moving average had risen to 21 20 still below the market well it so happens that the 10 Delta put is exactly at 2120 so the 200-day moving average is not below the 10 Delta put so we can initiate the next trade by selling that put at 2120 and buying the 20 70 protective foot and taken this time 505 dollars in net credit that's because when we subtract out how much we bought the lower put 4 from the cash we received for the higher put we're left with five hundred five dollars well by expiration February 17th the SPX had rallied further to 20 350 thus both the 21 20 short foot and the 20 70 long puts expired worthless and again we get to just pocket that five hundred five dollars so here's how the first two months played out as you can see we made five hundred ten dollars from the January trade and five hundred five dollars from the February trade for a total of 1015 dollars after the first two months now one thing you be thinking about is the fact that the trade is 70 days long but we start a new trade every 30 days so you'll need another allocation of capital put the second trade on now from our back test it looks like you'll need about four thousand seven hundred fifty dollars for each trade on average according to how much brokers will allocate to the risk on each of these trades but you'll need another four thousand seven hundred fifty to do the next trade while the first one is still alive so we allocate 4750 to the first trade then 30 days later we allocate another forty seven fifty for the second trade for a total of ninety five hundred dollars for both traits when it's time to put on the third trade we simply close the first trade and roll that capital into the third trade so we keep doing this every month so that the most we have ever have in the trade for both months combined is ninety five hundred dollars of capital incidentally closing the first trade to roll the capital into the third trade has a cost it's not done for free the returns we calculated for 2017 and 2018 for this trade take those costs into consideration and deduct them from the profits if we just let the trades expire and didn't close them we would have made a lot more money but then we would have needed much more capital to run the three trades simultaneously and that would have brought down our returns ultimately now after running this trade strictly following the rules for all of 2017 and all of 2018 we just blew away the stock market while the market made a terrific nineteen percent return in 2017 we made 49 percent and while the market lost seven percent in 2018 we made 22 percent and this includes winning trades losing trades and the months we skipped because the market was trading below the 200-day moving average at the time of initiation so I hope that this video successfully demonstrated the power of selling put credit spreads in a very simple easy to understand strategy that just takes a commonly watched indicator the 200-day moving average and allows it to act as a precautionary signal to stay clear until the market settles down you see how it handily outperformed the market even making a trip returned in a year where the rest of the market lost money so with option strategies you don't have to just close your eyes when the market is in trouble you can deftly trade around those situations and come out ahead of the buy and hold investors and their mediocre returns now just to remind you as I said earlier if you enjoyed this video and would like to learn three more real-world option strategies that our traders use again including the surprisingly simple and powerful strategy that some of the greatest investors in the world like Warren Buffett use all the time plus an options trading strategy has a statistical 80 percent probability of profit month in and month out plus an option strategy that you can employ with the stock that you like where you'll make your target profit where the stock goes up goes nowhere or even goes down a small percentage then you should check out the free options class that we're currently running just go ahead and click the link that should be appearing now at the top right hand corner of your screen that will open the free registration page in a new window so you don't lose this video again it's an extremely rare opportunity for retail traders and investors to learn directly from Wall Street traders but that's exactly what you'll be getting through this free online workshop so click the link to sign up now and don't miss it now one more thing I'd like you to do is to go ahead and click our subscribe button so you don't miss any of our trading videos produced for the trading and investing community and while you're at it please add your feedback in the comments section for what videos you'd like us to produce next as well as what you found helpful from this video so from all of us at SMB trade well

Channel: SMB Capital

Views: 46,066

Rating: 4.8930659 out of 5

Keywords: stock market, day trading, smb capital, trading, investing, markets, wall street, stock trading, options trading, options income, economics, finance, An Easy Options Strategy that Crushed The Market

Id: UOX2_YaAIRc

Length: 16min 25sec (985 seconds)

Published: Thu Jun 13 2019