Here’s How A Simple Options Income Strategy Could Have Easily Beaten The 2019 Equity Markets

there are no two ways about it the S&P 500 index had a remarkable performance last year rising almost 29 percent in 2019 I'm pretty sure that most investors would find that to be a hard performance to beat but in this video we're gonna show you an extremely simple options trading strategy that if implemented carefully could have performed more than twice as well as the S&P 500 index did last year and that's saying something I'm the head trader of SMB capitals options trading desk in Manhattan I can tell you from experience that most traders and investors just don't think that certain returns are possible but auctions create unique opportunities for profit that most other trading instruments just can't deliver so if you're interested in an easy to learn strategy that could have beaten the market by more than 100 percent in this stellar 2019 equities market then stick around because I think you're going to be pretty surprised at how easily this could have been done [Music] hi I'm Seth Freiburg 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 now I'd like to suggest you click on our subscribe button right now so that you don't miss any of our free trading videos that we produce for the traders and investors all over the world they're really very valuable ok so one of the great things about options income strategies is that they can be adapted to accommodate trading signals so that the combination of a simple option strategy and a commonly used trading signal can be incredibly power powerful if you know how to apply them together now in the case of the equity markets one of the most widely watched indicators is the 200-day moving average when it's breached to the downside many traders fear that a bearish trend has developed and so lots of traders tend to get bearish when that average gets breeze breach so let's say that you wanted to use that indicator as a signal to get in and out of bullish options trades that could be a reasonable thing to do and so I'd like to work through a particular option strategy known as the put credit spread and let's study how it should have performed in 2019 if utilized in a certain specific and easy-to-understand way now before we get into that I just want to spend a minute to make sure that everyone watching this up to speed about the basics of the way options work so that they can follow this study that we did and realize why it should have beaten the hell out of the market returns in 2019 now most of you are probably familiar with index options which are the options that are used in this example but there may be some who just have a passing knowledge of how they work so I'm gonna do a quick basic review of the basics so that you'll all be able to understand this strategy for those experienced options guys out there don't worry this is going to be quick and then we'll jump right back into the guts of the lesson so you're probably all familiar with how equity options work with equity options a call buys you the right to buy one hundred share the stock at the strike price is that option anytime before the option expires and a put option entitles you to sell 100 shares of stock at the strike price of the put before that options expires but there are also index options which works similarly to equity options except that there's no such thing as 100 shares of an index like the S&P 500 so you can't really buy or sell 100 shares of an index but what you can do is get paid in cash $100 per point if the index expires above the strike price of an index call that you buy or alternatively you'd be paid $100 per point for each point the index drops below the strike price of your index puts so for example if the SPX index is trading at 3,000 and you buy the 30 10 call if the SPX goes to 30 15 you should receive $500 in your account if the index closes at three thousand and ten or lower your call expires worthless on the other side of the ledger if you buy a twenty nine 85 foot and the market sells off to 29 75 you'd make $1,000 but if the market just sold off to 29 85 or higher the put expires worthless so those are the basics of index options now it's important to be clear on what index options are because we're talking about a strategy that we want to compare to the performance of the S&P 500 index in 2019 so we're going to use index options to implement this strategy okay so first of all we could establish a rule that the trade will not be implemented unless the sp500 index is trading above its 200-day moving average as that's a bullish trade and furthermore when we do implement the trade if at any point during the trade the market closes below the 200-day moving average for more than three days then we can see that as a signal that the market is probably going to turn bearish and thus close our bullish trade and wait for another opportunity to get back involved in the trade once the market remains above that 200-day moving average so let's take a look at the chart of the S&P 500 in 2019 as you can see the first time the market moved above the 200 day in 2019 was in early February remember the market had a hard sell off in the final quarter of 2018 so it took a little while for that to be overcome in terms of the moving average so let's suppose that when we're in this condition when the market is above the 200-day moving average we could enter into a put credit spread way below the market for safety now virtually every broker that allows you to trade options provides provides you with some metrics on the options you're trading and those metrics are called the options Greeks the options Greeks are various sophisticated measures of how options react to changes in the price and volatility of the underlying stock or index that the option is derived from so one of those Greeks is called an options delta and it's basically measuring how much the price of an option should move based on the movement of the stock or index that the options derive from the farther an option strike is from the market price of whatever you're trading the smaller its delta is so for example if the SPX index is trading at 3,000 and the strike price of a put option is that say 29.95 just five points below the price of the index then that option will have a delta of around fifty but if the strike price of the put is twenty eight hundred two hundred points below the market then the delta could be as little as five or ten depending on how far the option is from its expiration date so that's a very high-level summary of deltas okay so getting back to our trade if we have a protocol that as long as the market is above its 200-day moving average then we're going to sell a put at ten delta way below the market price on an option that expires in 60 days in other words two months from now so in 2019 the first opportunity we could have had to do that should have actually been February 12th so on that day the SPX was trading at twenty seven forty five and the ten Delta option was way down there at 25 75 170 points below the market so on that day we sold 10 of those 25 75 puts for $19.25 each below that we bought ten points lower ten of those 2565 puts for protection at an $18 price so if the market really starts to sell off that long put at 2565 it gets activated as a protective hedge against the short put options we sold 10 points higher at twenty five seventy five now let's drill down and try to understand what exactly is going on here and how this trade works so this formation where we sell a put way below the market and then buy a put even farther down from the market as protection that's known as the put credit spread now let's take a look at how this works when we sell the 1575 put we receive $19.25 times 100 times 10 because we sold ten of them so we received 19,000 $250 then we moved down to the 1565 puts that we bought and you'll see that we had to pay $18,000 for the ten of those netting us cash flow of $1,250 now your broker for margining purposes should require you to have about eight thousand seven hundred fifty dollars for this trade which is the worst case scenario loss on the trade by the way so therefore that's really the capital that we've invested in the trade which makes sense because the puts we sold are so far from the market a hundred seventy points below the market in fact that the market has to take quite a dive for either though either of those options to be activated and so the risk in the trade is larger than the reward but the reward is very very likely to happen because then only one instance where the market goes down a lot do we lose on this trade if the market goes up goes nowhere or goes down modestly we should win the trade as you'll see in a minute now the rules of the trade are that we should stay in the trade as long as the market stays above the 200-day moving average as we mentioned if it falls below the 200-day then we should wait three days and if one the third day it closes below the 200-day moving average we would close the trade that way we avoid the noise of a small market move below the 200-day which gets bought up quickly but if the profit on the trade is greater than 90% of the original cash credit that we received we should close the trade for a profit so now let's move forward to March 28th and as you can see we're still in the trade the market did very briefly move below the 200-day moving average but it quickly rebounded so we didn't hit out of the trade so now on March 28th we're only 15 days before these options expire and we've been in the trade for 42 five days so let's analyze where we are exactly on the position being 15 15 days from expiration you can see that the prices of the options have dropped quite a bit that 2575 that we sold for $19.25 it's now bound to a dollar 15 and the 2565 that we bought for 18 is now down to a dollar five so at this point you close the trade and let's run through exactly why you'd close it so originally you'll remember that we received 1200 $1,250 for the combination of selling the 1025 75 puts and buying the 1025 65 puts we needed $1,250 out of that transaction well what if we wanted to close the trade well at this point we'd have to pay a dollar 15 the market price of the put now to close our short position at 25 75 and we'd be able to sell our long 2565 for a dollar five so if you do the math we take our original 1250 that we received we spend 1150 to buy back the ten short puts at twenty five seventy five and we sell the long puts for ten fifty so we're left with cash of $1,150 well remember we said we should close the trade when our profit has attained at least ninety percent of the credit we originally received and as you can see we can close the trade for a 92% credit and so therefore we'll close the trade and pocket the $1,150 now since we're still above the 200-day moving average we could simply reopen another trade as soon as an options chain opens up which is 60 days out and that happens on April 9th now on that day the SPX had rallied up to 28 77 and was still well above the 200-day moving average so we could go ahead and sell the 2715 puts which are the ten Delta puts we talked about and by those 2705 puts for protection now you'll notice we receive nineteen dollars and forty cents for the twenty seven fifteen puts and we'd have to pay eighteen thirty five for the twenty seven oh five foot so if you do the math we've received one thousand and fifty dollar credit this time for an initial investment of eight thousand nine hundred fifty dollars now before we run through how this trade worked out as well as the equivalent rates for the rest of the year I wanted to mention that we're currently running a two our free intensive workshop at the moment we're all be teaching you three real-world option strategies the professional options traders use including a really simple but incredibly effective 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 eighty 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 so if those strategies are interest to you 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 should open the free registration page in the new window so don't worry you won't lose this video or you can just go on over to options class com to register for this free intensive workshop it's a 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 okay so now we've entered our second trade in our 2019 put credit spread campaign and you'll see that we've moved forward to June 5th and the SPX is actually sold down to 2018 but with only three days left and the puts being more than 100 points below the market there would have to be a hell of a sell-off for those options to actually pay off and so the market was assigning very little value to them well again reached the point as you can see where we can close the trade for in this case so little that we were able to hang on to 95% of that original $1,050 credit because it only cost us $50 to close the trade and as long as the SPX stays above the 200-day moving average and doesn't close below it for more than three days we should throw on another trade sixty days out from expiration so it turns out that the conditions were acceptable according to our trade standards four more times during the year in early June in late July in September and November of 2019 so we were able to execute the trade six total times during the year of course only when our conditions were met and here are the results with a little under $9,000 deployed on six trades spread throughout the year the results were obviously impressive a 67 percent return on capital mind you we were out of the market for a number of months where our trade standards were not being met that's well more than twice the incredibly impressive twenty-nine percent returns of large cap stocks in 2019 where you'd have to have been in the market the entire year to appreciate those kinds of returns so what I'd like you to take away from this video is the fact that it can be extremely powerful to combine the principles of options income trading with market indicators like the 200-day moving averages we did with this simple put credit spread program triggered by the market trading above the 200-day moving average when you do this you can get surprisingly superior results compared to the performance of the underlying dick indexes if you understand how to position your long and short options in the statistically correct locations in relation to the market and have the discipline to stick to your trading playbook because you have confidence that should work out from back testing and live trading experience just to remind you as I said earlier if you enjoyed this video and learn something valuable from it and you'd like to learn the details of three real-world option strategies that professional options traders use all the time 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 should open up the free registration page in a new window so you won't lose this video don't worry or you can just head on over to options class com to register for this free intensive workshop it's really a 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 okay so now I'm interested in hearing from you what indicators do you use in your trading that you think might lend itself to options income strategies such as to put credit spread I'm really interested to see what you'll suggest we'll do another video like this to test out the best ideas we get showing how we could apply options income strategies to express the directions suggested by your indicators and let's see what happens I'm really looking forward to what indicators you'd suggest so please comment those below

Channel: SMB Capital

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Keywords: consistent options income strategy, options income, options income blueprint program, options income masters review, options income strategies, options income trading, options income trading why do you win so frequently, options trading strategies for monthly income, credit spread options for income, monthly income strategies with options, selling call options for income, selling options for income, selling weekly options for income, selling weekly put options for income

Id: PgghzkCugZ8

Length: 17min 38sec (1058 seconds)

Published: Thu Jan 09 2020