Is it Easy to Make Weekly Income Through Options Trading? (the answer may surprise you)

so we hear from traders all the time who are looking for a reliable weekly option strategy that they can employ to meaningfully supplement their weekly income I'm the head trader on SMB capital's options trading desk here in Manhattan and I would say that that quest for weekly income is the most common reason that we're contacted here on the options side of things this video is about a weekly strategy that has actually performed quite well over the last 12 months and I'll show you that in a minute but there's something extremely important to understand about this and and really all weekly strategies that may not be readily apparent so stick around I think you're gonna find this intriguing [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 now I'd like to suggest that 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 investing community all over the world they're really very valuable ok so we were contacted this week as we are most weeks by one of our YouTube followers who shared with us that he's been exploring weekly income strategies using the SPX index and was asking if I could suggest a particular weekly strategy where he could earn $1,000 per week trading that strategy and the honest answer is that I've seen dozens of weekly option strategies on the SPX over the years and while there are a number of them that have shown promise and solid returns all of them have one particular property that is crucial to understand that will emerge as we show you the strategy but it's really important that you watch this video all the way through you're going to miss a very important principle and it would not be a good idea if you didn't understand that principle before you started to trade this or any weekly options income strategy on an index now most of you are probably familiar with index options which are the options that we'll be using 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 be able to understand this strategy for those experienced options guys out there don't worry this week quick and then we'll jump right back into the guts of the lesson so you are probably all familiar with how equity options work with equity options that call buys you the right to buy 100 shares of the stock at the strike price of that option any time 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 option expires but there are also index options which works similarly to equity options except 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 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 in the that the index drops below the strike price of your index foot so for example if the X SPX index is trading at three thousand and you buy the thirty ten call if the SPX goes to three thirty fifteen you would receive five hundred dollars in your account if the index closes at thirty ten or lower your call expires worthless on the other side of the ledger if you buy a 2985 foot and the market sells off to 2975 you'd make a thousand dollars but if the market just sold off to twenty nine eighty five or higher the put would expire worthless so those are the basics of index options okay with that in mind we can jump into the particular SPX weekly strategy that has performed so well over this last year and take a deep dive into how it works but before that I wanted to mention that we're currently running a two our free intensive workshop at the moment where we'll be teaching you three more real-world option strategies that professional options traders use including a really simple but incredibly effective strategy that some of the greatest investors in the world like Warren Buffett used 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 the 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 would be of 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 right now at the top right hand 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 or you could just go on ahead 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 to sign up now and don't miss it okay so this particular strategy is what is known as a weekly broken wing butterfly and it is normally entered approximately two weeks before the Friday expiration of the SPX index options now almost all online brokers that offer options trading have a field which gives you an estimate of how much an options price will move based on the movement of the price of the underlying instrument that the option is derived from which in this case is the SPX index so let's take a look at an example of a weekly broken wing butterfly 14 days out from its entry so as you can see we picked a trade started on November 15th and the trade involves a broken wing butterfly trade for the options chain that expires on November 29th two weeks into the future now let's drill down and understand what's going on here as you can see the SPX index was trading at 3109 on that day so the first thing we do is to find the 10 Delta puts for that week and those in this case are the 3040 puts so we sell 20 of those and then we move up five points to the 3045 puts and buy 10 of those finally we move down as many strikes as we have to to buy the put option that leaves us with at least a one thousand dollar credit for the transaction so let's break down why we made each of the decisions upon entry okay so as as we said we're going to sell the 10 Delta option at the outside of the trade well that options price is seven dollars and 20 cents and we sold 20 of those and each option represents a value of $100.00 per point for a total amount of fourteen thousand four hundred dollars of cash we received for selling those options at the same time we buy ten of those options five points above the options we sold and those were going for seven dollars and seventy cents per put option which comes to 77 hundred dollars for those ten puts and then finally remember we were going to move down the chain further until we found a put priced at a low enough price that we would be left over with at least 1,000 dollars after we bought it well in this case that turned out to be the 30 20 put which was going for five dollars and 40 cents at that time so if we do the math on that one it turns out to be a total cash cost of fifty four hundred dollars so if you now add them all together we're left with a credit of thirteen hundred dollars and that cash goes right into your account at the outset of the trade now the rules of the trade are simple once the trade is up one thousand dollars we exit and take our one thousand dollar profit if on the other hand the trade is drawn down we exit at a loss no more than two thousand dollars okay so now let's move forward to ten days later on November 25th and you'll see that the SPX index has rallied to thirty one twenty two well there are only now five days left before these options expire and the highest of the three puts the thirty forty five is now seventy seven points below the market so in this rally the market is not giving much value to that option it's only valuing it at 70 cents in fact whereas when we first bought it we had to pay seven dollars and seventy cents if you remember so that option price is just two which makes sense given how close we are to expiration and the fact that the market has rallied away from those strikes and so of course the strikes below that are going to be even cheaper because they're even farther from the market and as you can see the twenty short 30 40 puts have dropped to 65 cents and the 30 20 long puts at the bottom of the trade they've dropped down to 45 cents there's just too far for the market to go and too little time left for the options to retain much value so let's break down exactly why we hit our target profit on this trade when we first enter the trade remember we collected a credit of $1300 well to close this trade we basically have to reverse each original transaction so when you do that you all see that the 30 45-foot has dropped to 70 cents so since we're long that we're going to sell it and receive $700 in cash for that as you can see from the calculation and then you'll also notice that the 30 40 put has dropped to 65 cents and so to buy that back we only need to spend $1300 which is way below the $7.00 and 20 cent price that we sold them for so we made an excellent profit on those 20 and then finally those 30 20 puts at the bottom well they have dropped to 45 cents so we only receive $450 when we sell those so if you add up all the debits and all the credits of closing the trade you can see that we're left with one thousand one hundred fifty dollars of our original $1,300 credit that we received initially so this trade hit its target profit of $1,000 or more so we ran a test over the last 12 months which included incidentally a big portion of the sell-off that took place at the end of 2018 especially around Christmas as well as numerous other periods in 2019 where we had sell-off such as in May August and October and nonetheless the trade held up remarkably well in fact the trade was exited at the profit target of $1,000 or more 41 out of the 52 trades tested and exited at a loss of 2,000 or more on 11 of those 52 occasions the total profit during that period of time according to our test was twenty-two thousand eight hundred fifteen dollars and were estimating pretty conservatively that your broker would have required you to dedicate about $28,000 of your capital to the trade throughout the year so that comes to an 81 percent return so now what is the crucial takeaway from this video remember this all started out with the premise that the trader wanted to figure out a way of pulling $1,000 a week out of the market through an optin strategy that does not require a directional opinion and we showed you a strategy where you could have made over twenty-two thousand dollars with twenty eight thousand dollars of capital well if the trader had put say sixty-five thousand dollars into the trade instead of twenty eight thousand like we did in our test if you do the math that would have produced about fifty-two thousand dollars of profit over the past year which is a thousand dollars a week so could there be a way of pulling a thousand dollars out of the market through an options income strategy and the answer is yes and no yes over the long haul you would have averaged one thousand dollars a week of income doing this trade however in some weeks and sometimes multiple weeks in a row you could have lost 2,000 or perhaps more if the market gap through your stop which does happen in some cases and happened in this back test to think that you would have pulled $1000 out of the market each week like an ATM machine is magical thinking it doesn't work that way and you can't plan your life and your finances around finding a strategy that will just pay you $1,000 a week like a paycheck the good news is that you can get there but not in a straight line because you will have both winning weeks and losing weeks so yes you can have a strategy that has a target of $1,000 a week and that target can be very frequently achieved as was the case with this example today but you have to understand that on the way you will have losing weeks if you can't accept the losing weeks and you don't plan your personal cash flow of wrap around that eventuality then you shouldn't be trading it's as simple as that but if you're mature and you realize that with discipline you can find strategies that will yield on average $1,000 a week over a long period like say a year then you're on your way to being a realistic trader with mature realistic goals in fact those are the very kinds of traders that we like to have on our trading desk here at SMB now just to remind you as I said earlier if you enjoyed this video and learn something valuable from it and would like to learn the details of 3 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 will open 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 comm 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 ok so if you like this video please make sure to press the subscribe button so that you won't miss any of our future content and also plate please make sure to comment below with any comments about what you learned from this video and whether other topics you might like us to cover in future videos until then from all of us at SMB trade well and make some improvement in your trading approach each day so that you can become an elite trader which is what we wish for every one of our subscribers

Channel: SMB Capital

Views: 285,463

Rating: 4.8611608 out of 5

Keywords: weekly income, weekly income investment, weekly income options, weekly income selling options, weekly income trading options, weekly butterflies for income, weekly butterfly strategy, options trading, options trading for beginners, options trading strategies

Id: Qj8_3eybnaE

Length: 14min 37sec (877 seconds)

Published: Tue Nov 26 2019