Price Channel Trading Strategy

when you think of the term price Channel you're probably thinking something along the lines of two parallel trend lines on a chart where the price of the stock seems to trade you know to the top of the trendline and then maybe work its way down to the lower trendline you can see an example here but in this video I'm gonna share a strategy using a different type of price channel and how it can be used for selling high probability put credit spreads and we're gonna take a look at 23 years of data from the s py ETF and I think you're really gonna find these stats pretty cool so my name is Eric and welcome to this week's edition of liquid options it's a weekly trading show about options I hope you'll join me every Wednesday night for a new episode right here on YouTube and if you haven't done so already be sure to subscribe to the channel and click that little bell to get a reminder for next week's show the price channel training strategy is coming right up [Music] so before we dive into the price channel strategy for selling put credit spreads let's real quick talk about what it means to sell a put credit spread and I know a lot of you guys already know this and that's fine but it kind of ties in to the strategy so I I just want to cover that real quick here so as most of you know when you sell a put credit spread or a bull put spread the goal of the trade really is for you to sell something at one price and you want it to lose value over time so that you can either buy it back cheaper or even just let it expire worthless and in some cases that happen so for this to happen for you to sell something and if for it to lose value in this case I put spread the price of the stock in this case we're looking at the SP Y the ETF the price needs to stay above the put spread that you sold so for example if I sell a put spread down here at you know if let's say I sell the 260-foot and I buy the two you know two fifty seven and a half put for protection this is my put credit spread I'm gonna receive a credit and the goal over the next week or two or whatever the timeframe is that I sold is for the price of the ETF to stay above these levels if it does this would expire worthless now sometimes if the if the market rallies it becomes cheaper faster and you can buy it back and there's all kinds of variations of things but in general the goal is for the market or the stock to stay above the put spread that you sold so since this strategy is you know relatively bullish strategy the next thing we need to kind of understand is wind should would you do this and if you guys watch my last video on the SP Y you know we talked a little bit about bull and bear markets and essentially what what I'm doing in this study is you know I really only want to put on bullish strategies when the market is relatively bullish and that sort of determining factor or defining that that that market type is the to a I'm putting as the 200-day moving average zoom out this is what this moving average it it's the 200-day simple moving average and so we're gonna look at selling the put spreads only if we're trading above the 200-day moving average and we're gonna talk about the price channel in a second but essentially we only want to trade bullish strategies in bullish markets and there's other strategies we can do later but for this strategy we're gonna look at twenty years of data with the price Channel but the market has to be trading above that just want to make sure you understand that when we when we start looking at some of these numbers okay so the next thing we want to look at is let's talk about price Channel I know you guys probably read some books and you looked it up and you seen what price channels are and you know a lot of times price channels are defined as you know sort of trend lines between levels and this is not a good example but you kind of get the gist of it this could be considered a really sloppy price Channel but the point is you have a channel that the the stock is trading in and this in this case this is kind of a bullish price Channel and then it kind of broke out and it's it's all kind of stuff right now but but we're not gonna be looking at trend line based price channels we're gonna be looking at strictly a price Channel so let me clear off these drawings and let me show you what I mean so what I'm gonna do is I'm gonna come into my studies here and I'm just gonna come over to thinkorswim and and this is what they refer to as a price Channel and I'm gonna set that you'll see why in a minute I'm gonna set this to ten and we'll put that on there and now I have a price channel this is a different type of price channel that surrounds price and since I set it to ten and we're looking at the daily chart we're basically looking at two lines the bottom line is the ten day low the top line is the 10 day high so that is the channel and you can see that as the price moves up so does the 10 day low because it looks at whatever the the previous 10 day low was and then as it moves up it's the price moves up the lows move up and you can kind of see that this kind of keeps happening you can see that and this kind of surge up we had a really you know high moving 10 period low and then you have the high here as well this is the price channel it's the 10-day high and the 10-day low and they can expand and contract depending on you know the volatility and depending on how fast this thing moves and what we're gonna be focused on is this 10-day low so let's tie this back into options and put credit spreads real quick so just conceptually and I'm gonna zoom in here when we're at the 10-day high volatility most likely has contracted because we are bullish and as in this case the SP why it sold off a few days in a row and eventually hit a 10-day low so that's typically when you want to be a seller of options like in the put credit spread strategy where volatility is has risen because the market is selling off so by trading put credit spreads at the 10-day low you're gonna get a little bit better price than if you're trading credit spreads at the 10-day high and there's a million studies on you know buying the dip and all these other things you guys can look all that stuff up but but essentially buying or or getting long I should say that's a 10-day low is definitely a higher probability of profit than it is buying at the 10-day high or the breakout so from an option perspective though what we're concerned about is selling put credit spreads at the 10-day low and then what we want to do is we want time to pass and we want that as we mentioned before to make money in the pocket spread we want time to pass and we want to see how long the price stays above those levels so that's kind of the foundation of the strategy we're gonna get we're gonna keep diving into some details here but that's the foundation here we're looking at selling put credit spreads at 10-day lows and we're actually gonna look at selling them out of the money not right at the low and we'll look at the probabilities that it stays out of the money in the last 20 years so let's zoom in real quick and just kind of do a conceptual sort of trade sup and then we'll look at the statistics so you can see this was you know from the time of doing this video it's about a week and a half ago maybe two weeks ago you can see the market had kind of hitted to attend a high which remember ten days is is two weeks because we're talking about trading days somewhere so that's not fourteen calendar calendar days it's ten trading days which is two weeks so we hit a 10-day high or two-week high and the market sold off one two three four days in a row had a little bit of a dip and then if you count backwards here you can see that the the 10-day low line actually dipped as well and you can see that because we if we count backwards - one two three four five six seven eight nine ten the low was here that is let me draw this in just so we kind of understand the channel part of it so if I I draw this this was the 10-day low was from this candle because it was ten days back well this candle kind of went through that so the very next day that 10-day low is now the low of this candle so on this particular day that would be a trading signal to where we're selling we would want to sell a put credit spread and out of the money and we'll talk about how far in a minute but we essentially want to sell a put a credit spread when it's hitting that 10-day low because of two things first it's still above the 200-day moving average so you know I know we're kind of teetering on there right now however from the backtest study we were looking at trades above or trigger points we like to call-- and this is a trigger point it's above the 2-minute 200-day moving average and we hit a 10-day low so we look to sell a put credit spread that's a little bit out of the money and then we look for time to pass for the put credit spread to lose value or you know if we rally from here great this thing's gonna go worthless right so that's essentially what the setup is is we're looking for a pullback into the 10-day low making a new ten-day low not a close a low and if it's still above the 200-day moving average we would consider selling a put credit spread and we're gonna use the example of four percent out of the money if you look at four percent after out of the money and we'll kind of dive into this in a minute we're gonna look at what deltas are they tend to be in the low twenty to twenty-five Delta range and we'll kind of talk about that so in this example if we sold a put credit spread that's four percent out of the money at the time that the we made this let's say it's the end of the day we realize we make a new low at that time the low is right around 263 so if I bring up a calculator here it's a giant calculator but if I do 263 times 0.9 t6 that would be 4% lower we get a level of 252 and you can see that 252 is way below museum a little bit 252 is down in this area ok so again you're selling a pretty safe out of the money put put credit spread when you're hitting this 10-day low all right so let's take a quick second before we dive into the option chain and we'll look at the deltas let's look at the the back test result okay so here's my spreadsheet and basically what I've what I've done is I had someone help me because I'm not super adept in Excel but basically we took over 20 years this goes back to 1995 and we've configured the spreadsheet we have the 200-day moving average and this can be changed we can do TMA and no moving average I like to just kind of stick to the 200 and the trigger point is the 10-day low and this is the the lower low scenario so then ten days later is how far we're looking and you know currently in this spreadsheet so and then we're looking at a point 96 percent of the trigger point which is what we just looked at in the calculator so what this information from the past 20 what is that 23 years this goes all the way up to you know for at first quarter so of this year when the SP y and let me just kind of put this in a you know sentence format for the past 23 years when the SP why hit a new 10 day low 10 days later it was above the 4 percent below level 94% of the time so let me let me go back to the chart because that might make more sense to you here so again when the SP why hit a tenday low and it was still above the 200-day moving average 94% of the time it was above the 252 level down here or 4% lower 94% of the time now does that mean 10 days later if you sold a 30 day credit spread but crisper does that mean you're making money the answer is no because you can still have you could still sell off and be down in the trade so 10 days may not be enough and this is where you kind of have to think about what time frame of an option sell you seller you are so 10 days you're not going to get a huge amount of credit 4% away from the money with only 10 days to expiration so let's go back to the spreadsheet and when I you know I'm still in the camp of taking partial profits so when I sell a put credit spread I like to sell something closer to 40 to 50 maybe even 60 days later and maybe not for this particular study but but I like that 40 to 50 day range and so I know you know theoretically that if if I can stay in the trade and this and the strikes stay below price for 20 days I know that I can probably collect half my credit so in this example let's say I sold the spread I collected 50 cents or whatever I know - you know this is for weeks remember these are these are trading days 20 days is four weeks later so Mike if my credit spread can stay out of the money four weeks later I should be in the profit area and obviously if it rallies then that's even better so you notice as I change it to 20 the percentage that it stays above that is actually 90 percent which is still pretty good it's a little bit less than 10 days and that kind of gets you into you know do you want to sell closer to the money or not but for this you know particular example I'm doing 20 days later 90% of the time let's go back to the chart 90% of the time the s py is still gonna be above this level twenty days later for the past you know 23 years as long as that was above the 200-day moving average so I just want you to kind of you know think about that that you can sell a put credit spread on the sell-off and have a pretty good confidence that if you sell something where you can get a decent credit around this far away you got a good probability that it stays out of the money a little bit later so we can change this a little bit if I if I want to be even safer I can do point ninety five percent which is five percent away and look it actually goes back ups which is kind of interesting so there's a lot of numbers and I haven't explored every possible combination here I kind of ended up on point ninety six because you seem to be able to get a pretty decent credit so let's look at the option chain and just you know we'll go back to this example just as our kind of core example here and this was on 4/20 for 2018 so let me get this set up and think back and then we'll kind of look through it okay so I'm in the think back function or a tab inside of thinkorswim and I prefer to trade SPX so even though we're talking about SP why this is perfectly applicable I think to look at SP X we're going to put that in there and again we're gonna go back to the date for April 24 which was a Tuesday and then we're gonna say okay now we want to sell a crisper and I'm gonna look at the June it's got fifty days and again this is the cool thing about weekly options you can actually choose what you want to sell but let's just kind of stick with the monthlies for this example so at the time of this day as the SPX was trading that 26:34 so let's put the calculator back up and we'll clear this one do 26 34 times 0.96 because that's where we want to sell or put credit spread that puts us at 25 28 so we're gonna be looking for either the 25 25 strike or the 25 30 so let's just go to the monthlies here and we'll do 25 30 and here's where I was talking about the deltas so some people swear by Delta 10 and 15 and 20 so the 2530 which was just around 4% away was actually a delta 26 and then 25 25 was Delta 25 so you can sort of see that Delta 26 is you know you could go a little safer if that's what you wanted to wanted to do but let's just for this example I'm gonna right-click and I'm gonna sell a vertical here and let me bring this up and you can see for this one strike why this is $5 spread I get about 95 cents that's pretty good you can widen this out a little bit because remember the strike we're concerned with this is the one we sell but we can widen this out the 25 20 and we get a little bit a little bit better credit for this example I'll keep it one strike with so get 95 cents so on this day we sold this credit spread for about 95 cents and then if we fast forward you know this was this day we fast forward one two three four five six seven eight nine ten we're 11 days over and if we go back to the analyze tab and we'll just go to today's date oh that's the wrong day sorry the trade date and the P&L date yeah that's right so we'll go to today and you can see that we're already profited $65 so of the $95 or 95 cents we've we've sold we could already take well over 50% of the credit and close the trade which in my case that's what I would probably do cuz when you actually look at the chart in this example we got a nice little rally we probably took profits a few days so that's really what this strategy is is saying is if you're above the 200-day moving average when you hit a 10-day low consider selling and out of the money put credit spread about 4% or so and hold it for a couple weeks and give yourself enough time and credit and we'll go back to the spreadsheet here you got a pretty good chance that this thing stays out of the money several days later in this case the 10-day low with the 20 days later 4% away it was about 90% so I think that fits in if you're selling or put credit spreads you know 30 to 45 days holding it 20 days you should be able to get a pretty decent credit so real quick it if you're interested in getting a copy of this spreadsheet it's kind of big so I'm gonna have to put it up in a downloadable area let me know in the comments section and I'll try to make that available again there's 20 something years of data it's not going to update but you can really play around with these numbers so let me know in the comments section if you're interested in if there's enough people interested I'll figure out how to put this up for you guys and it'll be super helpful helpful if you guys could like this video and subscribe to the channel as well so thanks for watching again my name is Eric I appreciate the support and I'll talk to you guys next Wednesday night for the next episode of liquid options and I'll talk to you then have a great week

Channel: Stock Market Options Trading

Views: 8,712

Rating: 4.939394 out of 5

Keywords: price channel trading strategy, price channel, price channel strategy, price channel indicator, channel trading strategy, trading channels, channel trading, selling put credit spreads, trading strategy for selling put credit spreads, spy trading strategy, vsa, spy options trading strategies, spy credit spreads, spy options strategy, spx options trading strategies, spx trading strategies, $SPY, $SPX, SPX options trading

Id: 3rjOms7JekQ

Length: 19min 32sec (1172 seconds)

Published: Wed May 09 2018