How to Trade Weekly Options on SPX! 2021

how to trade weekly options on spx is what we're going to cover in this video and it's actually a replay of a live workshop i did for trading spx put credit spreads with seven days to expiration and is an update to all the previous versions so this is the latest version as of 2021 and i really think you should watch the entire video so you get the full trading plan details and the mindset and the results and the back tests you really want to take all of this in because i really want you to walk away from this video knowing exactly how to trade this on your own and so i think watching the entire video is really going to help that especially during the q a period towards the end and if you'd like a copy of the powerpoint that's shown in the video that covers the strategy so you can take it home and have the notes and everything i'm going to put a link in the description here on youtube we'll tell you how to get that i'll email it to you also in the description of the video on youtube you're going to find additional spx strategies and resources for zero dte and some other ones that i trade with members so be sure to check those out as well now let's get into the spx 7dte weekly options workshop and we're starting right now so let's get started what we're going to talk to you tonight is the spx 7dte strategy i've been trading this for a couple years i've had a couple different iterations and and basically it's a strategy that's kind of easy to follow many of you probably already trading this with me if you're you know over on patreon i've posted this in the network um and actually let me let me bring that up just so you know when you're in the stock market optionstraining.net site if you go to discovery um you can go down to the featured section and this uh 7dt put credit spread strategy i posted this i think it was in february so five or six months ago and we were trading a certain version so what i like to do is you know every few months six months um i like to rerun the back test if you will and i make little adjustments to see hey you know is there anything that's that can be improved sometimes you know you end up with a losing streak or something you're like okay well maybe we should make adjustments because the market you know it's always changing over time um i typically run a five-year look-back period when i do my back test and i know some people we get into disagreements about this um but some people well let's back-test 10 years and it's like well you know i don't i don't know that something 10 years ago was gonna work today so i like to keep it relatively fresh and i think with the covid crash um that actually gave us a good little mini bear market even it was it was a big bear market but the time frame that that the bear market was there was very short so that's something we had never seen before and some people get you know will get caught up with well you know what about 2008 which was a little more prolonged bear market and some of the software we use we can't actually go back that far and weekly options on spx that's what we're going to be talking about today they actually didn't have weekly options like that back in oh wait i don't think i think it might have been fridays only and then eventually they added mondays and wednesdays so you know i just kind of go with that five five years is my my number it's easy to do and i think you know when it puts out one 200 trades i think that's a good um that's enough trades to sort of validate whatever it is you're trying to validate so um but anyway the under the discovery section you'll see the featured area um we have disclaimer the rules this is you know important but if anyone wants to go back to this version and kind of see what it looked like five months ago you can do that so what we're doing is basically we're updating this um back test in in this um in this you know i call it a workshop so real quick a quick disclaimer trading stocks can be in an options and everything can be risky it's not suitable for everybody this is for informational purposes only should be construed as a recommendation i am not a financial advisor i'm just a regular person who likes to trade i like to share my ideas and the tools that i use um and you know if you have any questions you may want to contact a professional enough about that and real quick here's a couple resources um that that we're going to um kind of just i just want to touch on real quick so the free trading community is stock market options trading.net it operates like a facebook so if you're not on there already come over and join it's free people are posting ideas different trades that they take we do some back testing there i know there's a lot of other back testers back testing users there and there's a few people using e delta pro that's the software i'm going to use tonight and just for full disclosure i'm i'm a paying customer of e-delta pro but i'm also an affiliate so what that means is if if you're interested in that software and you were to sign up using my link i created this short link for you i do receive a small commission for that it's very small but you know it's it's something that helps pay for my software um and i can put out these videos so you can go to optionstrading.help edp and that'll take you to that if you're interested in that software i think it's about i think they charge you 100 bucks a month or 400 a year i think is what they do so it's pretty much you pretty much want to sign up if you're gonna do that for the year and then this uh strategy that we're gonna talk to tonight this is one of the strategies we trade with members over on patreon patreon is sort of like my premium blog there's alerts there's a few other strategies similar to this one that i do back test on so um there's a way you know an easy way to support the the research and all that stuff over there and some of many of you already over there so i appreciate all that and all that support so just wanted to distinguish the two sites and at some point i may try to get everything in one place but right now um this this is how things are operating operating online so before we get into all the details i wanted to discuss and a lot of the stuff i'm going to put here is stuff that i have to remind myself whenever i'm looking at a strategy because i know you've read a book you've watched the videos um you've probably maybe back tested something and there's certain strategies and there's just a million things out there and so whenever you're learning a new strategy these are just some sort of tips that i put for this presentation is really just to kind of be open to new ideas and um you know and just for this next hour or 45 minutes however long we go just forget everything you've learned about options so far forget about iv forget about 45 days to expiration and you know just not that you should forget about how that stuff works but just you know be open to different approaches um and because something we're gonna do tonight i think is a little bit different and again many of you have seen it before but the other thing too is and i'm really guilty of this is is you know try to see this through a little bit and and don't necessarily try to put your own twist on new strategies until you kind of explored whatever was presented to you and i see this a lot because there's so many indicators i try to get it as simple as possible but you know if you're if you're using other indicators and things and you're going to get conflicting um messages and sometimes you'll have two systems that both make money and on one particular trade one's gonna say take it and the other one's gonna say don't take it and you know one of them's gonna be right and that could be a loser for one strategy and could not be a loser for another strategy but ultimately both of those can still make money um so i sort of kind of get in the camp of let's just stick with one system from now and then if you want to add in and work on things on your own later that's great but that's just kind of you know a little bit of a tip and that's that's something i've been guilty of so less is more let's not overthink this and we're really going to be kind of just focusing on probabilities and that's things ultimately where where we all end up especially with options because there's some built-in probabilities and what we're trying to do is basically find a better probability to uh sort of establish an edge so i wanted to throw this in here too because the hardest part about some of these trades is that the trade itself is very simple um but sometimes it's hard to put on and really to make money trading um you have to find an edge in the market and what we're gonna you know what what i try to do is find an edge through some sort of consistent thing that we can do that makes money over time so that we don't have to watch the market all day we do i know i do watch the market all day but not for every trade and ultimately you have to believe in whatever the edge is so if you can't define the edge it can be hard for you to take that trade because again you're going to see the market you know this is a bullish trade we're going to talk to tonight you're gonna see the market doing something crazy you know like a sell-off and you're gonna be nervous to take that trade and and but that's the edge you know you have to be able to take the edge so you got you have to have the confidence to take that edge and take that trade when that opportunity presents itself so you're gonna have to be able to execute on the on the edge in a consistent manner i still struggle with this um sometimes you know i'll i'll skip trades mostly because i might feel like i'm too you know um too levered one direction or the other um and the other thing is you must understand and accept the risk for each trade and one of the things we'll touch on a little bit tonight is just the the risk and we're going to be talking about the defined risk spread so we're going to do credit spreads tonight and before you enter that trade we know exactly what our max gain is and our max losses so if you know your max losses let's say 300 for a trade you need to accept the fact that you might lose 300 that's what accepting the risk is and this is something that um that is talked about in mark douglas's book trading in the zone it's one of my favorite books and you need to be able to execute on that edge but also accept the risk and one of the things i see a lot with credit spreads really is that people don't accept the risk because they want to minimize that risk by using stop losses and things like that so what i've done to mitigate some of those big losers is we actually trade a little bit closer to the money so the credit is greater and the loss the max loss is less but you know if you're trading something that's very very far out of the money like a delta 10 or delta 20 and your credits just this big and your risk is this big then yes you may need to employ a stop but as you you know move up and down that scale of um you know how close you are to the money the risk and the gain sort of adjust as well so you have to find the spot that you're comfortable with the risk and this is this you know what we're going to talk through right now is what i'm comfortable with i understand the risk i know how much i can risk and ultimately you know you have to believe in your system and the way that i've become more consistent in the past few years is basically you know by back testing and seeing the results and just saying man if i just did this and i stayed consistent you know i'll be i'll i'll i'll make money over time so that's kind of just a little bit about you know having an edge and executing and you need ultimately a macro belief on your system and that's what we're going to look at tonight but then you have to execute that each week or each time that that opportunity uh presents itself so this is uh just kind of a quick snapshot of my uh several strategies actually four here um my spx end of day trading calendar so we're going to be back testing an e-delta pro and e-delta pro uses end-of-day option pricing so all the strategies that i use from e-delta pro are should be executed at the end of the day um as close to the end of the day as possible you know a lot of times you know we um we'll take these at 3 or 3 30 eastern you know 30 minutes before the close something like that but i just wanted to kind of put this calendar up here is what i'm trying to do the trade we're going to talk about tonight is the wednesday trade it's a seven day to expiration pcs dte is days to expiration pcs per credit spread and it's conditional and what conditional means is that we're going to use a moving average condition that's going to let us know if we should take the trade or not and we'll talk through that in a second um so what i've tried to do is sort of come up with like you know strategies that work best on monday strategies that work best on tuesday wednesday i've really had a hard time finding a good thursday strategy um other at least with spx i've got some covered call stuff that i do there but and then i think recently i think it was episode 29 of the podcast i talked through a conservative what i kind of term as a conservative strategy um that's that we're taking these trades on friday so it's a 60-day put credit spread and then we have a monthly hedge that kind of goes with that so um these are the strategies that we're trading over on patreon um but we're going to talk through the one uh for wednesday here and let me go ahead and bring up the back testing software okay so um we're gonna we're gonna do this back test from scratch this is e delta pro um you can see that i have a million different things here um and some of them are more experimental but we're gonna do this one from scratch because i want you to see the software um and i know a lot of people out there are using um e delta pro and i you know sometimes i'll get a message that says hey i set it up but i'm getting different results i kind of want to show you how i'm setting these up because there are some little parameters that you can adjust mainly to do with the width of spreads and um and we call it the uh the delta or the dte variants so anyway we're going to start from scratch and we're going to come off the knowledge that we already know in this point that wednesday has been a better day for this so we're going to just stick with wednesday for now and just real quick we're going to put in our ticker we're back testing xpx we're doing five years we're going to be short a put spread and this is going to put um a short put here and a long put and you can adjust the width and all that so what i like to do is i double click on this and i can link it so that way what we're first going to back test is a selling a delta 48 put that means that it's typically the first put out of the money and we're going to buy a put that's five points lower so on spx this would be a a single strike wide um put spread or uh five points wide that's a single strike right wide we're going to do seven days to expiration and and we're going to trade this weekly on wednesday and before we get into that in this little gear icon there's a loud dte range and since we really want to narrow down on wednesday only um i'm going to narrow this down to zero so there's it's only going to do on wednesday and the reason why that is is sometimes let's say the market happened to be closed on wednesday for a holiday or something like that what the software would do is maybe pick a friday and then becomes not 70 to east so i try to really get it narrow and then for whatever reason that week that wednesday the markets closed and we simply just wouldn't do that trade and we also want the width to be very narrow um the the delta match so we really want this to be wednesday five wide and even with these settings sometimes the software is going to make it of 10 wide and it you know there's a couple of them that are a little bit wider but you know this is the the software we're kind of working with but those are the settings i typically use um you know it's it's only going to take one spread at a time and it defaults to a hundred thousand balance you can change this here i don't really pay attention to that so that's the one setting that i think um you know if you're using the software you can kind of play around with when you're doing these back tests so the first thing we're gonna do is we're just gonna run this without any filter and we're just going to look at you know if if the last five years from july up to july 30th this is a couple days back for the last five years we took this trade every wednesday no matter what you know what what would that look like so we're going to go ahead and run that sometimes these can take a minute but once once these are established we'll have them all over here we can kind of flip back and forth between them but i wanted to kind of start with you know without any sort of filter meaning we just take every trade um so you can kind of see what what that looks like so and what i might be able to do here is that might be too big that might be a little better for you guys to see so let's go down to the results and i think it's important that we kind of factor in all these things if we if this is something you decide you want to trade there's a lot of things to look at um in this case it made a little over seven thousand dollars if you think about that a five wide spread is um you know your average credit here in this case was 197 dollars that means your average risk was about i'm going to call it dollars maybe three hundred and ten dollars so if you're risking three hundred dollars a week for one contract this is what that made over the last five years seven thousand dollars so it's a pretty significant return that's averaging fifty dollars per trade that's combining all the winners and the losers we might want to call that expectancy so um if you're risking let's just say 300 per week and you're you're averaging 50 then that's i don't know 15 not maybe not 20 but 15 or so gain per week now we know that when you're selling this put credit spread if we're if we're averaging our average win is a hundred i'm going to just round this to 200 her average loss is 300 most of the time one of those things is going to happen you're either going to make your your full credit you're going to make that max gain or you're going to make that max loss sometimes it lands in between and there can be a partial gain and a partial loss but in the mo for the most part um you're going to see one of those two things happen so what this average 50 that doesn't mean that each week you'll make 50. i just want to be clear this is just the combined the expectancy when you average that over time so in this case we had a 70 win rate it took 143 trade uh 144 trades excuse me you'll see that this max loss was 5.95 or the largest loss i should say and typically when you go into the log file which i'm not going to do but you can go through each trade sometimes you'll see one that maybe took a 10 wide spread and where the credit might have been three or four hundred dollars but you lost you know you had a max loss on that wider spread so again there is no perfect software um but let's look at the p l curve so you know 70 win rate did pretty well for a while and you can see in 2020 there was a pretty big drawdown um with the covet crash and you actually had some pretty big drawdowns here so you know just by blindly taking this trade every week this actually did pretty well the reason i don't like to to do that is because um we don't really know if there's going to be a prolonged downturn and that's something i mentioned before with the covet crash it was very quick we had a downturn of a couple months and then it was kind of back off to the races and was very choppy down here but ultimately we had a nice run back up and it's been it's been a pretty good run the last you know let's call it a year or so so someday you know the market is going to go down again i know it seems impossible but it will and you know i'd like to have what i call a a bull market filter or something some kind of conditional thing to tell me that um that the market you know maybe we shouldn't trade this week and sometimes that means giving up a little bit of your gains but it's actually a lot easier to trade so real quick i'm going to flip over to a price chart of spx and i want to talk a little bit about moving averages for the past um i don't know probably a year so we've been trading this using the 8 ema and the 21 ema as a bull market filter and basically saying that the 8 ema or excuse excuse me if the 8 ema is above the 21 ema we're going to consider that a bullish condition so therefore on that wednesday if the eight ema is above the 21 ema then we would go ahead and take the trade or we're gonna tell the software to take the trade if for some reason the adma trades below um you know like in the covid crash the market goes you know would go lower then the 8 ema would cross below and then on that wednesday you would not take the trade so this can kind of keep you out of some of the larger downturns and that's something that you know i think is pretty valuable so we're going to go back to the software we're going to add this in and by the way we're we're simply holding to expiration here we're we're entering the trade at the end of the day on wednesday and no stop no target we're just letting it go and wherever it lands it lands we're letting the math play out so i'm not utilizing any of these fields down here so we're going to come into the filter and we're going to add an ema filter and what we're going to say back test is say we're going to do the 8 ema is above the 21 ema now for those that are using e delta pro you may know that there's some moving average issues with using spx as the reference but if you type in spy here what this will do is it'll look to spy the moving averages of spy which is pretty pretty close to spx it's not exact but it's close enough to where this will be a good moving average reference so when it looks at spy it's going to say is the 8 ema over the 21 ema yes okay is it wednesday yes okay take that trade the delta 48 spread so i'm gonna come out of here so now we have that technical filter this is what when i put on my calendar it's conditional and let's go ahead and run this again and so whenever you added a filter like this you know that you're going to have a lesser amount of trades and that can be good that can be bad we're going to see the difference here but ultimately what we're trying to do is not trade not put money in the market or at least into this trade when the conditions aren't optimal so let's scroll down a little bit so you can see the first thing is we do have less trades we have 104 trades the win rate's a little bit higher 72 but you actually made a little bit less money overall but you made on average more money for trade so this is the trade-off and if i if i click over here this is more of a quick comparison of the two so at this point this becomes more of a personal decision about which one you prefer some people look at the p l and say well i want to make more money that's great if you want to make more money at least the last five years this one made more money but again i have a hard time with that because i don't know that we're going to be in a bull market forever and if we get into an extended bull market you know i don't maybe want to um you know deal with an extended period of losers you know for example so we can see that it still lost money and um during the covid crash so there's still a little bit of a downturn there um but ultimately it kind of rose up and so you know it it's because this is a short-term bullish trade it tends to follow um the spx um in the general you know kind of bull market so so again the trade-off here is you get to trade less you have 40 less trades 144 trades versus 104 so that is um about 40 less trades but you're making only you know um maybe 20 less in actual profit so it's a trade-off it's you know whatever one you feel like you want to do and this is where people start to get into their own analysis and when you add your own analysis about your prediction of what the market's going to do over the next seven days then you're at that point you're not trading the strategy anymore you're trading your own analysis and that's where that consistency to believe in the edge sort of that i mentioned before that's something that you gotta try to factor in so i i'm guilty of that as well so um so that's the one we've been looking at over the last year we've been training that so what we're going to do now is something very simple is we're going to come in here and we're basically just going to change the 8 ema to the 3 ema and i you know i tested all kinds of emas um i typically use the fibonacci numbers that's where i get these numbers from so 1 plus 2 is 3 2 plus 3 is 5. 3 plus 5 is 8 that's where we get 8 from and then 5 plus 8 is 13 and 8 plus 13 is 21 and so on and so forth so those are the numbers i use for my ema's that's where i get those from i know you know you could probably do this with a a simple and a you know five day simple and a 20 simple something like that but that's just kind of where i get those from um so we're going to run this with the three ema over the 21 ema while that's running i'm gonna go back to the chart here and let's just turn that i'm gonna add the three ema and it's if you just kind of look at this it's it's actually pretty similar so the 3 ema is in white you have the 8 in green and the 21 in blue so in a typical bullish kind of market run the three is going to be above the 21 and the eight is going to be in above the 21. so it's not that much different um the part that you'll see that's a little bit different is when the market does turn down that three ema is actually going to turn down much sooner below the 21 versus the the adma in this particular case that we're looking at that was actually not good because had you if this was a wednesday and you sold that spread that actually would have been a profitable trade so there are times where there's the quick dips the three ema using the 3ma is going to keep you out of there but it's also going to get you out of an extended down downtrend sooner and the same thing coming back into the trade and um i don't know if i could find a good example here but here both of them came through but on this particular day let me zoom in a little bit the 3ma cross back above so if this was a wednesday you'd be in this trade where's the adma you wouldn't so that's just kind of the handoff i don't want to get to like you know which one's better we're just going to look at the back test it should be done now so let's take a look and again 104 trades very similar to the adma but actually made a little bit more money so it made sixty dollars per trade and it made uh you know a little over six thousand dollars so we compare the three the first one here was take the trade every week 144 trades had a 70 win rate versus the second one is the 8 ema over the 21 ema improve the win rate a little bit made less money because you're not trading as much um but the three ema actually had a little bit better stats than the adma and this is the one that i'm going to be trading now so 73 win rate made it a little over 6 000 you're you're if you're making you know out on average 60 per trade that's when you combine all the winners and the losers together and again if you're risking um about 300 a trade and you're making 60 that's about a 20 game that you're making in and um so if anyone you know correct my math too if i say anything wrong sometimes i misspeak but uh but anyway that's um that is the five wide version so i wanted to stop for a second and in a second we're going to we're going to do 10 wide which is the 10 point wide spread i'm going to show you there's some benefits to that but i wanted to pause for a second a second and let me know if you guys have any questions so far feel free to put in the chat or you can unmute yourself and you know just ask uh yeah i had a question just in terms of the way you're calculating the percentage you know the 20 percent to me i mean that technically is right but i'm i need more of a portfolio approach in terms of the size of the account and then how many contracts would you trade how much risk would you put on right two percent five percent because you know if you had uh if you were doing it just by the margin you know you could have a hundred thousand dollar account and go all in but you'd be risking 60 percent of your account right blow up so yeah don't do that no no i'm not i'm not i'm not going to do that but it's kind of like seeing a profit loss curve with a certain size account with a certain percentage size risk i don't know if that software can create that or yeah and this is a good point and it's something i get questioned about a lot so the way i look at this and i don't know if uh lee is on tonight he's really good with this type of stuff um but here so let's do this if we know that um if we know that our average gain is here is about 192 dollars and the average loss was done i'm just going to say your average is when is 200 your average loss is 300. so from a risk standpoint i you know i would not risk more than you know one or two percent on on the trade the other thing you have to keep in mind is what else you're trading and this is how i how i look at it so for example i trade a lot of short-term bullish stuff so i lean more towards the one percent two percent okay because i may have another trade um i did a video or a article on uh broken wing butterfly which is a very similar trade but it's on monday to friday well if the market tanks at the end of the end of the week you know both those trades become losers so i i try to keep aware of my just net delta exposure on shorter you know different time frames if you will so that's something that's really hard to do we're kind of looking at and this is a good point we're looking at this trade in isolation the way i kind of look at it is maybe what we can do here is let's um let's say instead of a hundred thousand we're instead of looking at as our portfolio let's look at this as like okay i want to allocate for 45 let's say 5 000 oh okay five now right because the software is only going to take one trade at a time you know what let's do let's do 3 000 right so let's say you dedicate and and by dedicate i mean you're going to allocate three thousand dollars to this trade and again just to be clear i'm not a financial advisor i can't recommend this i'm just trying to help make the math seem a little bit more normal so i'm going to go ahead and run this and we're going to get the same results but we're going to look at the the difference here so if we if we allocated 3 000 so let's say you have the hundred thousand dollar portfolio and you say okay um for for a three thousand dollar for for three percent of my account i'm gonna trade one contract of these and the reason why you need to think about that is because when you have um several let's say you have three or four losers in a row and you lose three hundred dollars let's say you have a bad month and you lose four times in a row and you're losing three hundred dollars per trade you're going to have lost um you know twelve hundred dollars so you can't just go in with saying i'm gonna put the whole thing on there because you don't have any room for losers there does that make sense you know to kind of oh yeah for sure i mean with three thousand dollars you're risking ten percent for trade which is well for no you're still only taking one spread per three thousand dollars right so you're risking three hundred dollars per trade of your three thousand dollars the rest of the three thousand dollars will be in cash right so you're only risking of that three thousand dollars yeah you're risking ten percent of the three thousand is that maybe that's what you said i'm sorry yeah okay sorry um so that's kind of how i look at it is i wanna dedicate or dedicate allocate however you wanna determine a certain number and this is just an example we say let's say it's three thousand dollars so if i allocated three thousand dollars to this trade i'm only trading one contract per week that means most of the time most of it's in cash that's where a lot of my money is my options money is in cash and i'm allocating money because i know when i have losers the account's gonna you know it's gonna do this you know um but over that um you know over that period you this this particular version made about um sixty two hundred dollars so that three thousand that you've allocated turned into six thousand but you only traded 300 300 of risk at a time right i don't know if that helps or not i know that kind of does help okay so and to be honest it's something i'm still working on too because i have several of these um these style where it's like okay you're gonna trade this one every wednesday and trade this one every friday and kind of making sure that you don't get over leveraged if the bear market comes or you you know you wake up to um the next covid you know delta variants been knocking at our door you know who knows what's going to happen so i know that if the market blows up next week and i have seven trades where i'm only risking one percent per trade and they all blow up and i'm going to be down seven percent in my portfolio but um but i know that i also have a lot of cash that i can you know do other things with so um any other questions about that or any other comments i'm i'm definitely open to other people yeah this type of thing someone wants to see what about just doing the past two years and not five years because we've had the crazy bull run sure we can do two years and we'll stick with the three thousand dollar allocation um there is not a way to do compounding inside the software however you can download the trade log um and i think it spits it out as an excel file so that is some things you can do with the software and i'll show you the trade log here in a minute once this one runs this is a two year bulk of the trades um [Music] yeah bull run okay so over the last two years this is how this did you can see this was the the covet crash and then it recovered and these flat lines that's typically when the moving average condition isn't present so during the covet crash um the eight the three ema was below so it might not trade it for a few weeks and you get back in and then you know kind of does that so that's why you have these flat lines here and then ultimately you know so this is what what it looks like over the past two years so made a little bit less money per trade over the last two years is to let about 70 win rate um yes you can download the trade log from e delta pro and yes you could add compounding to it to yourself if you um were to do that i cannot back test more than one contract at a time so you're just gonna have to extrapolate these results um go back to the five year if you sold 10 contracts versus one contract it would just simply be 10 times that does the software itemize 104 trades yes any promotion on the software um i there's a promotion if you sign up with my link because i get a credit but i don't have any pricing promotion for that question let's go ahead and look in the trade log just so you can see what this looks like um so what the trade log tells you is the date that's the price of of spx at the time of that date it tells you the strikes that it took um the entry price for each one in this case you got 170 credit that means the margin was 330 because this was five wide and held expiration this one experienced max gain and you can see the very next one experienced max loss and so you can kind of we'll just kind of gently throw scroll through these numbers so you might have several uh max gains in a row and then here's a looks like a a partial one this must have landed between the strikes somewhere um and then you know and then your max loss comes right so you can experience a couple max losses in a row and you have a couple max gains so you know you and this is where you just have to have enough cushion to absorb the losers that's why you don't want to go all in with your you know if you have a especially if you have a small account let's say you have a three thousand dollar account five thousand dollar account um you really only want to trade one of these because you can see that you can lose have multiple max loss losers right you can also have multiple winners here and something to just kind of understand about probabilities is the the distribution of the wins and losses are completely unknown right we're looking at this one snapshot back in time but moving forward the pattern of wins and losses is going to be completely different um but given that we're taking over 100 trades 140 trades something like that um that's enough you know evidence if you will for me to say okay i'm going to trade this i'm going to allocate i'm going to risk you know one percent um per trade of my accounts why so for me you know i might i might do a couple contracts for my options account per week sometimes it changes a little bit but um uh but yeah you can you can download this to excel and then you could probably for those who wanted to do compounding you could probably do that see is the thinking correct okay let me sorry let me scroll back up someone wants to take profits early good questions have you thought of other indicators other than ema um so start with that so yes um i have done ema i've done sma the problem is in this particular software the only real filters i have are uh moving averages iv rsi i've i've done some various things with that and the simplest one was just hey is the market in a bullish condition yes okay take the trade that says hey just be flat to higher over the next seven days and you make money um it's the simplest simplest one the other thing was when you're trading things with short term like this because we're using end of day options pricing um and end of date uh even with rsi it's gonna look at the end of the day number and at that point there's no intraday getting out with a stop or loss so someone asked can we take profit uh profits at 50 of the max profit so yes we'll do that but what this is gonna do it's gonna look at the end of each day so if you open this on wednesday the next day it's going to say have you achieved 50 profit no okay wait till uh friday and so it doesn't do it throughout the day there's no intraday it's not like you're gonna if you were to put a gt um a gtc order that says hey buy this spread back for half the credit that i got 50 max profit the software isn't going to do that it's going to wait till the end of the day which is fine for the max profit but when you talk about a stop loss that could blow through your stop loss and then it's going to close it so this is why when you're using this particular system or end of day back testing that it's really hard to do to back test stop losses on short term spreads but we'll go ahead and run a 50 max profits just so you can see so this one was the two year i'm gonna remove that one so this is year without and five years with okay so we did five years this time with a 50 max profit and a couple things that that does one it actually improves your win rate you went from a 73 to a 78 win rate so if that makes you feel good great um i don't think it's enough for me because the profit was to me significantly less you only made you're averaging 42 per trade or 4 300 so that's almost um 30 25 30 less by taking profits early at least 50 profits let's do 75 that did a little better of course because you're taking um your booking profits uh you're looking at more profit and as expected it's a little bit lower when right here so not lower it's i'm sorry it's lower than the 50 but not but higher than the um the no profit taking so you know there are some options here maybe 75 is better maybe this is good enough you know 56 that's actually pretty close to 60 so you could take profits early and you know reality i do this a lot like if i feel like um the way i kind of approach this is sometimes let's say spx is trading at 4300 and you have the 4300 put credit spread and seven days later it's at 4301 and you're really really close i'll often close this early because i don't want to risk some late day fade blowing the whole thing up but if the market has rallied and you have a lot of room 10 20 30 points then a lot of times i'll try to let it hang in there as long as i can but i am known for taking profits a little bit early but you know to systematize a certain number i think cuts you a little bit short but i will close the trade early if i feel like there's any other risk in the market so there are some real world implications that that i try to factor in so someone asked is the thinking correct to assume that the past five years of this back test is to help outline what the next five years might turn out to be in a sense um what we're trying to establish here is that if the market's in a bullish condition that selling a bull put spread just below price that the market would stay flat to higher over the next seven days i do expect that that's going to play out i i do expect that that's going to have a positive expectancy i think that can be profitable will it be as profitable i don't know if again if we look at this you know there was a period of time where it wasn't that profitable right but then there's a period of time where it's super profitable so this is what i expect i expect it to be all over the place but i expect it to go from the bottom left to the top right over an extended period of time that's the macro belief but i have to understand that i have to keep it small because i can have those um you know a series of losers or a period of time where it doesn't work okay are you personally doing these trades weekly yes i personally trade these these are trades i send in alerts over on patreon so we've been trading this with members for you know probably a couple years now we've changed it a little bit but this is the updated version um huge max drawdown yeah there is a drawdown here for this one particular strategy as as any other strategy i guess instead of stop-loss on profits what about changing the stop-loss on the losing side instead of taking max loss can you filter it so it takes you out of the trade at a loss of 200 and 250 dollars um in this software i can only choose a stop loss percentage so let me um but again you can't really um [Music] what's the word because when you think of stop-losses if you put a stop-loss order in your brokerage platform is going to be constantly um checking to see if that stop loss parameter is hit and if it's hit then it's going to close it let's say at 1 pm on a friday or whatever but the backtest software is going to wait till the end of the day and if it's exceeded that stop then it will close the trade but you'll have lost more than that is so we can do a stop loss here i'll do 100 to run it but i can't believe this unless what you're gonna do is every day you're not gonna have a stop-loss order in and you're gonna wait till the end of the day and if at the end of the day that stop-loss has been hit then you would close it yourself so that's to me just it's not a realistic thing i wish it did intraday um this is something that we um have the ability to do in other software that we've built ourselves and i'm not gonna get into that tonight um but you know even though um even though you have the stop loss in place it's still you know you still have a similar pattern here so i just kind of get to you just accept the risk that that's just my take on it i'm here to show you all the things that i can show you but you can make your own decision for what you'd want to do but we can see that a lot of times having the stop loss you end up with a worse win rate and ultimately less profit a little bit it's not that that much less but again it's really hard to follow this the way that the software is testing it's hard to follow that in real life so i like to kind of go with um you know go with what i'm able to replicate as close as i can to the actual test itself um can you close a trade during market hours yes the software cannot i don't know if that's what you're asking a neil the software close it has a single price at the end of the day that's one of the limitations of back testing um so okay so we we talked about the five wide spread and then what i want to do now and make sure the settings are right is i want to do 10 wide and and we're still using the three ema so i'm going to run this so a 10 wide spread is going to get you more credit because the protection you're buying is a little bit farther away and and the risk is going to be more because it's basically like like having two two spreads so but what i wanted to point out here though is i'm using down here this is the five wide here which averaged 60 a trade and the 10 wide average 115 trade but the 10 wide actually had a slightly better win rate and the reason why that is is because when you have the narrower your spreads are your breakeven is going to be somewhere between the sold strike and the bot strike when you widen that spread out the break-even point actually gets lowered a little bit and so what we've seen over the past five years according to this is that that's enough to give you a slightly better win rate nothing crazy it's it's probably you know um two or three trades that probably weren't losers and that doesn't mean you made max gain it just means that the winner the break-even point was lower so potentially the loss could have been lower as well or simply you could have had a bigger gain because where the break-even point is so i did a video on this on youtube somewhere but i wanted to show you the 10 wide one this is actually the one that i'm gonna start trading myself um because i think it's i like the idea that um that the win rate's slightly higher there's a just you know it's probably like one or two points in the spx but you know you made about the same amount of money and you know if you were to trade two of the five wide spreads you have to pay two commissions so even though the average trade here is 60 and this is 115 it's not quite double i think the net net it's going to be like trading two because you're not going to have as many commissions on opening that trade so i wanted to just kind of show you that that version of it let me go back to the powerpoint real quick and i want to talk through the trade and just kind of um just outside the back now that we've kind of seen the the results of the last five years the updated version i'm going to be trading the 10 wide but i wanted to show you both the 5 wide and the 10 wide the 5 wide you can trade with less money of course but here's the general setup on wednesday near the end of the trading session if the 3 ema looks to close above the 21 ema on the spx daily chart that means you're making that decision that day it's not the day before it's that same day so if it looks like the three ema is going to close above the 21 then you you could consider taking the trade i'm gonna sell a pcs a put credit spread with seven days to expiration that means it expires the following wednesday and you're gonna do the sold strikes gonna be one strike out of the money and the software we put delta 48 and usually can i have a picture of this here in a second but usually the delta 47 or 49 you basically want the one that's just out of the money and the bot strike is going to be 10 points lower or that's the one that i was going to be doing you can also do five points lower depends on what you want to do and and the back test is hold to expiration but as i said there are times where i will take profits early um i've you know sometimes if you get the win behind your back on day one where you take the trade on wednesday and then thursday and friday are massive rallies then sometimes i'll close the trade before the weekend because i don't want to risk you know what's left in the trade so i still employ some of those um you know tactics if you will and again when you come to expiration the following week if it's tuesday and i have a little bit of a profit or maybe even you know sometimes a loss but if there's a little bit of a profit i may consider closing because at that point the probability really is a coin flip between a max loss and a max game so sometimes i'll close there early too but from the back test perspective it was holding to expiration trying to get more to that but it's hard to do when you're watching the market move around um and we kind of touched on this using the max loss of the spread as your amount that you risk um you know even if you're using an intraday stop i've seen these trades where you put this trade on thursday and i'm sorry wednesday and then thursday and friday just sell off and you think this thing is just going to be a max loss and then all of a sudden the thing turns around and it's not the following week so it can be very volatile to watch which is why i try to do as much hands off as i can but ultimately just know that max loss can happen because we're selling so close to the money but the credit you're receiving is so much greater the risk is actually less and if we you know if we were to sell a spread that's much lower your credit's going to be lower and the risk is going to be a lot more because if you're selling a spread and you're only getting a dollar for the for the spread that means you're risking 400 and yeah you might your win win rate might be a little bit better but you are going to get some max losses and those max's losses those max losses are going to be bigger okay so here's just real quick what this looks like i just took a picture out of um tasty works here so here's what this would look like in this particular case um the sold strike was a delta 49 that's one strike out of the money and i bought the buying 10 points lower so this was a credit of 350 that would make the the max loss 650 for this particular trade so but again if you narrow that and you sell five wide your credit will be cut in half but so will your risk and then i put in here screenshots i'm gonna again put this powerpoint over um on the website stockmarketoptiontrading.net and i'll put in the events section once i post a replay and just to kind of show you what the back test looks like i'm showing you the 10 wide one and here were the results for the 10 wide for the five year period and the dates are up here as well july 30th 2016 through uh july 30th 2030. okay so that's enough of the presentation let's go back to the chat there's a few questions here um how much capital would you allocate for one contract 10 wide um well one contract 10 wide you're going to be risky and and we'll go to this example you'll be risking about 650 dollars so in tastyworks the buying power is 650 for that for this you know example um if you're asking how much capital would i allocate that's really gets into everyone's personal trading plan and risk tolerance and all that stuff i try to keep any one particular trade limited to one to two percent risk so in a hundred thousand dollar account if you're risking six hundred fifty dollars you might do two spreads you know and that way if the trade blows up for whatever reason you've only lost twelve hundred dollars which was you know one percent or so you can do if i guess three spreads would be two percent in a sense um have you tried one or two strikes in the money for a bullish scenario um we can do that so what he's saying is instead of selling slightly out of the money let's sell slightly in the money so let's go to delta 51. we'll do a 52. so if we go back to bringing this back up so a delta 52 would be selling so at this point the spx is at 4402 in this screenshot so by selling the 4405 which would be the delta 52 and buying 10 points lower that means we actually really need the market to move up so you can get the max gain um and but your credit's going to be more so let's let's run that so if the market does nothing you could actually lose money because you're actually a few points in the money now the cool thing about spx is that it's cash settled so you can be sitting in the money and you'll never get a sign because it's a cash settled product so um this actually did pretty well 69 percent win rate your average gain was 400 so um if we compare that to here so instead of 350 your average gains a little bit more um it made 11 000 versus almost 12 000 here so it actually did not make as much am i reading that right let's see this is the delta 52 yeah delta 52. so it actually made a little bit less but it had more portrayed as it just oh 94 trades huh something's something's weird there i have to look that up it did pretty well but you have to be comfortable um that you're trading in a more bullish manner are the ema indicators to help account for the possible downturn of the market coming yes um yeah that's what the ema is for the ema filter is to keep us out of any sort of extended bearish period because ultimately this is a bullish trading we want the market you know if you're selling a strike here over the next seven days you want the market to be flat or higher and the moving averages can sometimes indicate that that filters out potential you know extended uh consecutive losses have you tried this on spy i don't recommend it on spy because many times um when we when we're let's go back to this picture many times when you sell this the market can actually dip in here uh below your strike and you can be at risk of early assignment so you know i don't recommend this on sp why however you could consider xsp which is just like spx in the sense that it's cash settled um there's no early assignment and if it expires in the money you can let it expire in the money and they just you know they'll charge you an exercise fee but you won't be assigned but it has the same price as spy so you could do this with xsp um if you're if you want to trade this in smaller size in that case you would do one strike wide it's a tenth the size so a one strike um one strike spread in xsp is a tenth the size of a 10 point wide spread in spx and that's kind of sounds a lot someone says they're off to tell me about their sty assignment story earlier this year or someday yeah i've heard some stories like that freddie yeah that's why i just kind of avoid as i avoid a lot of that um with spy um i think i think if you're going to trade farther out of the money spreads where there's really not a risk of the the option going in the money i think it's fine but we're selling so close to the money that i just don't recommend sky i recommend spx or xsp so um well that's all i got it ended up being positive but still could have gone another way sorry said it again uh my my story uh it could have it ended up being a positive story but it could have gone the other way hmm yeah so you got a sign was it a put spread or how did that work yeah it was a put spread um i i was like oh it'll close out on itself and i obviously made that mistake uh i was like oh it all closed out on its own and it didn't um and then i got assigned on both of the strikes the next uh one i got to sign the next day on one of the strikes and then for some reason there was a day delay um on the other leg and uh the market went back up the next day i ended up selling um at a higher price than i bought the other leg that i got to sign the next day so you know i made a profit online but still it was like a thousand dollars on a one one one point um spread yeah yeah for spy i mean it's a lot of yeah when you're a lot of people try to trade spy because they're trying to conserve their costs and keep the risk down but if that thing expires you let it expire where one strikes in the money and the others out of the money it's going to cost you to be in that and you know to you're going to show up with 100 shares in your account or they're going to be asking you for money but um yeah yeah so i just stick with spx there's also tax advantages to spx um if you guys want to look that up there's 60 40 tax advantage too so i kind of ended up doing that um jason asked what about rolling up options is something i've tried um i've i've never been really good at rolling rolling up i mean i guess you could do that in a sense um but you know i think rolling you're still basically closing one and opening another so i don't know that would be any different um i just try to keep it you know simple especially if you're going to close early kind of thing you could try it in theory i guess it would be pretty much the same but um but i haven't done that myself um someone asked can we try the 3 over the 8 ema instead sure let's do it we're gonna do a three over the eight and trust me i've already done all this and i ended up with the three over the 21. i did the three over the five the five over the thirteen i did a bunch is xsp a 1256 contract um i don't know i'm not i'm not sure what you're asking gene it is like it is like spx um that it's cash settled um it it's an index it is an index so i i'm not maybe that's what you're asking so here is the the three over the eight ema this looks actually pretty good i'm 31 and trade very nice oh i have to look at this one now i may have to do an update to the the three over the 21. we still want five years yeah 77 [Music] yeah this is you know this is why i recommend uh anyone who who gets into this just you know it's it's really helpful to get the software because you can really go in here and and play with things and and you know some people find find things because it's sometimes you get through these and you get all these numbers over here and you're like okay this one did pretty well and it's like having to save it and all that stuff but uh it's it's pretty i think it's pretty educational just to go through this yourself because you really start to see the different pieces of what makes money and really what that is is your wins your losses and how much you win when you win and how much you lose when you lose that's really all this comes down to so it's really finding what it works for you and um yeah this actually looks pretty good who's walt good job walt thank you xsp is a 1256 contract same as spx okay all right good to know would you do the same strategies on rut iwm and dx and the short answer is no but let's let's do this we're going to do rut um do you have to look manually on thinkorswim to for those indicators for that three-day exponential over the eight-day exponential or whatever you or whatever parameters you pick um this was right by the way oh that didn't something's wrong right there whenever you see this sometimes there's a glitch and we end up having to contact the software people still using your own spy so no comment on rut i i've i've tested other things with iwm and typically spy and iwm they don't translate because rut's often more volatile and choppy so i wouldn't i wouldn't recommend this on rut um with that said i don't think this is accurate either but um sorry the question about the emas yes i look manually i'll just like i have different emas for different days if you've seen my other stuff so if i know it's wednesday um and i'm doing the three over the 21 i'll just do a quick glance sometimes i have more than one like okay yeah you know ultimately these are bullish so yeah i might look to take that trade and then you have like fed days and things like that where you're like okay do i want to take the trade do i wait sometimes i wait because the fed you'll get a lot of volatile action on a fed day which seems to be ramping up more recently not as much in the previous years but recently since pal there's been a lot of wednesday late day fades so you know sometimes there's those market factors

Channel: Stock Market Options Trading

Views: 8,079

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Keywords: how to trade weekly options, spx weekly options, spx options trading, how to trade, options trading, options trading strategies, options trading for beginners, options trading course, weekly options, spx options, weekly options strategies, option alpha, tastytrade, thinkorswim, edeltapro, smb capital, stock market, options income, option strategies, weekly options on SPX, spx, vsa, how to trade options, option trading, spx trading, bullish spx

Id: pmKPR_YiiQQ

Length: 68min 21sec (4101 seconds)

Published: Tue Aug 17 2021