Update to 0 DTE SPX Credit Spread Strategy July 25, 2021

hi everyone this is tammy chambliss i am making a new video about some updated information on my zero dte strategy i'm still trading it uh it's a very good strategy and i really like it it it's probably my most reliable strategy i've traded and i pretty much traded exclusively now so uh i hope to update you with with the latest research and some changes i've made to trading this and some additional information this video is a follow-up to a video i made on august 13 2020 that's on youtube if you search for tammy chambliss zero dte or tammy chambliss wealth enjoy uh that was a video made on this presentation of zero dte strategy to a group in singapore and um that that video has a lot of views i know a lot of people have watched that and learned how to trade this strategy from that uh hopefully you'll learn a little bit more from this video i will do a review a short review and then get into some of the things i'm going to cover today so let me share my screen and we'll get started so hopefully you are seeing that screen and uh as i said this is an updated strategy and tips for trading of the zero dte iron condors and credit spreads using spx this presentation is for informational purposes only and it's not intended as investment advice and any trade you make based on this information are your responsibility alone uh i disclaim any liability loss or risk resulting directly or indirectly from the use or application of any uh contents of this presentation i have to say that uh so what i'm going to cover today is a little bit about the basics the basic trade risk why does the strategy work some other things about the strategy and then i'm going to cover uh three example trades to show you how i manage the trade uh while it's on and uh that'll it'll be a good uh illustration of some of the things that i'm doing lately and then i also have some updated studies uh i have a study on decay that's in that original video but i have some updated studies on spreads and stops that i'll share with you and then i've got frequently asked questions and resources so to continue on uh the basics what is a zero dte trade it's basically trading options that expire that day so there is no overnight risk and that's one of the best advantages of this trade is is just tr entering in the morning exiting in the afternoon closing it or taking it to expiration or if it gets stopped out taking it off so you don't subject yourself to any overnight gaps up or down that can cause havoc with the short gamma trades and it's it's just been a good strategy for me and i hope you find it working well as also generally what i do is sell either iron condors or vertical spreads using options that expire that day and what i present here is what i've found works for me i've traded this since august 2019 so i've probably made all the mistakes you can make in this strategy at least i hope so i hope there's no more out there that i could make but there probably will be this strategy is a high probability low return strategy uh that relies on good loss management to be profitable in the long run and uh i would say that that's probably the key to this strategy is good loss management and i'll show you we'll talk about that setting stops and what kind of losses you can take on this because that's a very important part of this trade and then i trade this strategy on spx and i do that because it's cash settled it's fairly liquid there's no wash cell rules and it takes advantage of the section 1256 and the irs code which basically means your text the gains are taxed uh 40 percent of the gains are taxed at the long term tax rate and and sorry the reverse 60 percent of the gains are taxed at the long-term tax rate and 40 at the short-term tax rate that's a that's a huge that's money in your pocket compared to other strategies just on stocks where you don't get that advantage that's applicable to any index fund too and futures like es futures uh beyond that check with cboe on on what the tax what any tax advantages on any other stocks or indexes or etfs but i know that's applicable to the index options uh for the basic trade i enter on mondays wednesdays and fridays that's those are the days of expiration for spx in general there are some exceptions there are a few days like the end of the month which might be a zero dte trade or there might be a holiday and they move the date of expiration so but generally i find out when when those options are expiring and i'll trade that day then i sell between delta five and delta ten put and call vertical spread on spx or you can trade this on spy as well and i typically use a 25 point wide sometimes a 35 30 point wide spread if you're trading spy you can use fi three to five points spread on spy and the long options are used purely to reduce the buying power not to limit the risk in general i think credit spreads are taught where the with the risk is the width of the spread less the initial credit well i don't ever take it to where it's touching the long strike that's that's too big a loss on these trades so we we use a stop to exit early and keep our losses small so that again that's a very important part of this strategy so the basic uh risk graph for a credit spread is uh and this is a put credit spread you're selling a delta five plus or minus uh you're buying a put 25 to 30 points further out of the money in this example the stock price oops is uh sorry the stock price is uh 28.45 you sell the put delta five the 27.85 and you're buying the another option 25 points further out of money the 27.60 and so your total risk as shown by that dotted line at the bottom is 2500 because that's the width of the spread less the credit received but what i do is i set a stop so that my risk on the trade is only uh two times the initial credit of a hundred dollars so you collect a hundred dollars when you enter the trade and then if that trade does not uh trade below your strike or get near your strike during the day you're likely to leave it on to expiration and and have a winning trade the calls likewise very similar uh trade you're just selling delta five plus or minus call you're buying a call 25 to 30 points further out of the money and then you're setting a stop to trigger so that your net loss is no greater than 200 dollars so uh let's talk about risk a little bit uh i would say never risk more than two percent of your account in any one trade that's a that's a good rule to go by uh for sizing your trades uh you'll live to trade another day if you risk no more than two percent if you if you risk more than that let's say 10 percent of your account and you have two trades in a row that go against you you've all of a sudden got a 20 down on your account or more and it just makes it difficult to recover from you've got to you've got to have a lot of winning trades to recover from that so what i do is i exit the trade if the loss gets up to two times the initial credit and i do that by setting the stop for three times the initial credit um and that's a that seems to be a difficult concept for a lot of people to understand when you're setting the stop you're setting your trigger to to send the stop order to the broker for three times the initial credit of and i you can do that for either the spread or just the short strike and we'll talk about that a little bit but your net loss would be two times the initial credit because you subtract the credit that you received and for this strategy when i say risk i refer to the amount i would lose if i hit my stop order it is not the buying power required by the trade so for example if i had a 5 50 000 account uh two percent of that is a thousand dollars and i would set up the trade so that if i take a loss it won't exceed that amount so uh i figure out what my loss could be on the trade before i enter the trade and then i figure out what credit i need to get for that to be the max loss and uh why does this trade work it works because of the probabilities built into the options and i've done a lot of testing and it's amazing how accurate those deltas are in determining what percent of the time that option will hit will it will touch at expiration um there is a there's another rule that uh there's a probability of touch any time during the day of two times the delta so a ten percent probability of touch but a five percent uh probability at expiration and then i find by adding a stop on to that i reduce those probabilities uh of expiring worthless by about 10 to 15 percent so that would be 80 to 85 percent chance of expiring worthless on a delta 5. and then you can you can figure out what that is if you're trading a higher delta i usually trade around a delta seven or eight uh just because the premium is a little bit higher than a five but i i rarely if ever go above delta ten so i just stay in the low deltas the thing i like about this and the why does the trade work is theta is working in your favor time is always ticking and it it theta positive theta benefits this trade this trade also has a positive expectancy if you take the win rate times the average win and a loss rate times the average loss you end up with between a 20 and 40 percent expectancy and that's a pretty good expectancy for for a trade so uh there's a lot of people that aim for around uh 20 20 to 25 capture rate or expectancy and this this you can get a little bit higher with these trades and then again low delta trades are high probability but low return so what we're going to do is is always use some sort of risk control to make sure that we don't lose more than we should on these trades in order for the probabilities to work out so the entries for this trade i enter soon after the market opens or one way to do it is entering soon after the market opens uh there's there's higher premium right at the market open and and volatility is the highest uh at that point and then it tapers off pretty quickly in the first say 20 to 30 minutes and then that that premium is gone so it's when things are fairly calm at the open we're not getting huge moves or big jumps on the open then uh that's a fine way to enter just go ahead and enter both sides collect that higher premium and you know right off the bat your trade should start showing some profit the downside of that is when that doesn't happen and there are big moves at the open and there have been a number of days recently uh and and i'm recording this in july of 2021 uh i'd say may june july there's been a lot of big moves at the open so what i've chosen to do lately is wait uh uh to enter until i can tell better what direction the market might be heading in and um you know know that that's not always guaranteed but sometimes with these big moves at the open will get an opposite move right after and you're right back where you started from [Music] or you can get a big move and it can keep on going so i'll wait a bit to see kind of what's going to happen after the open and and then i'll enter puts if the market is dipped and looks like it's turning around i'm going to go up or i'll enter calls when the market has risen and it looks like it may turn around and retrace a little bit so those are both great times to enter and i'll show you some examples uh or you can enter this as a and you can enter this as an iron condor or enter each side separately i generally prefer to enter each side separately and manage those trades separately too you can and also you can trade just one side you don't have to trade both sides we've had a lot of uh up moves in the market in the last couple of months with this uh pretty much a raging bull market with a few pullbacks um so you know often i might be just in puts rather than in the call side because the call side seems to know no limit so i'll just trade puts and do fine the spread width that i use you can you can use a spread width from five wide to 25 wide i've heard or five wide to 50 wide or 100 wide or just sell naked options i've heard all kinds of combinations of the above i generally use a 25 wide spread and i'll show you some reasons for that if you have a stop on the whole spread sometimes a tighter spread will stop out faster than a wider spread and sometimes you can stay in the trade longer using a tighter spread so and i'll show you a study i've done on this there are times where a tighter spread will work out better than a wider spread and vice versa there are times when a wider spread generally works better than the tighter spreads and that just a rough idea of when that is uh wider spreads work better in lower volatility i'd say volatility below 20. uh and then tighter spreads work better involved in volatility or with a vix level of above 25 to 30 and that's because that long option on the tighter spread in higher volatility will really hang on to its value and benefit the trade so if you are stopped out it's uh it's likely that your it holds on to that premium so it's not likely uh it makes it less likely that you will be stopped out on the tighter spread in higher volatility the wider spreads work better in lower volatility because that long option is basically a throwaway option and this the overall spread seems to decay faster without the value of that long option contributing to the premium in the spread so i have found that trading 25 to 35 wide spreads are generally the sweet spot you can just trade that in all markets and do fine if you want to try to fine tune it based on volatility you can do that as i discussed above i used to recommend trading 50 wide spreads but after further back testing i found that the 25 wide spreads work equally well there there they basically act very similar to 50 wide spread not much difference but they require half of the buying power of a 50 wide spread so you can do more contracts and you can get about 75 percent of the credit of a wider spread so you get more credit for the buying power you're using and if you if you do one 50 wide spread you get um let's say uh 50 cents or a dollar and you do two 25 wide spreads at 75 cents each you're collecting 1.50 for the same buying power so i that's why i prefer the 25 wide spread and just a little better use of my buying power so if you have a limited amount of buying power then you can use a five to ten wide spread uh or a three to five wide spread in sp why and the advantage of those narrower spreads is that long option will have good value if you're stopped out on the short side and you can hang on to it and it could increase pretty quickly because it's close to the money if you're only 5 and 10 wide so that can work too so um when you enter the trade you you have to have an exit plan in place and you've got to know what's what you're going to do if you get stopped out of a trade if you trade these without an exit plan then and something bad happens you don't know what you're going to do and there is not enough time to think think straight or think clearly and all of us do it we just panic when the trade goes against us and then we start seeing red and that red just keeps getting bigger and bigger and you don't have a plan don't trade that way just know what you're gonna do decide what you're going to do to get out when the trade goes when the trade goes against you before you enter the trade and i recommend using a stop of three times the initial credit that seems to give the best overall return i hear of people using a stop of 1.5 times the initial credit or five times the initial credit but in my back testing the three times is kind of the sweet spot there and excuse me and it keeps your losses reasonable easily easy to recover from a two times net loss than it is from a 10 or 20 or 30 times net loss so please trade with stops and uh to set stops there's a few considerations uh you i'd recommend setting a stop only on the short leg and that's because it's easier to fill an order with one leg than it is two legs i know there's brokerages out there that that don't even allow you to place a stop on a spread and you have to set a stop on the short leg on that one and then just exit the long lead manually um once you set your stop then you just watch the trade and ideally you want to take the trade to expiration or you close it for five cents as you get near the end of the day but in higher volatility with big swings at the end of the day it is best to exit early so you don't risk losing the profit you've gained on that day but i don't like to pay more than 5 or 10 cents for that to get out of a trade toward the end of the day but it kind of depends on what's going on in the market if it's a if it's a wild day i don't mind getting out at 80 or 75 profit then i know i've i've put that profit in my pocket and i don't have to worry about it then if you get stopped out and you've placed a stop on the short leg only you can decide if you want to close that long leg right then or you could reuse that long leg by selling another short option against it let's say the stock goes down stops you out and immediately turns around and starts going away from your long and it looks like that was kind of a bottom of the day then it's fine to sell another option against that long it doesn't cost you anything to do that then you get the value of the premium without the cost of the long leg or you can just let it expire if that option is worth less than two and a half cents or less than five cents you're probably not going to be able to exit it anyway so you just let it expire and then if you if you get stopped out and you've closed your long leg or whatever you can wait and re-enter using further out of the money options to recoup some of that loss so there's always things you can do in the trade uh if you get stopped out and and and ways you can recoup that loss so let's talk about stops a little bit there are several types of stops one is a manual stop where you just mentally say okay uh my premium is uh 50 cents then i get out when the premium for that options trade is up to a dollar fifty three times the initial credit and i get out i exit the trade and that gives me a net loss of two of uh a dollar two times the initial credit but this means that you have to have the discipline to get out and there you've got to know yourself and and how you act under pressure if you do fine under pressure and you're able to uh you know trades going against you and it's it's getting close to your your mental stop you've got to be able to get out and have the discipline to do that and be able to trust yourself to do that if you can't trust yourself to get out when you need to get out there's a problem you know you've got to work on your self-trust um and and you know some of us just can't some people tend to negotiate with themselves or negotiate with the stock like uh it looks like it's gonna turn around or uh you know it just can't go down any further it's gone down a lot already it can go down further and it usually will go down further and it you've got to have the discipline to get out if you're going to use a manual stop if you don't have that discipline then i recommend using any of these other three uh stop stop orders to avoid that indecision when the time comes to exit manually so just rely on your computer to get you out and three different ways to set a stop order are first of all a market order where you set the price at which the stock triggers and the broker will close your trade at whatever price they can get for it and that price may not be uh it may be fine or it may not be to your liking but at least you're out of the trade and it can save you further losses the downside of market stops are there are road road spikes in option prices occasionally and it's debatable on what's causing those spikes but those can trigger your uh market order to be sent to the market and and trigger uh that stop so uh it can also happen that uh there's a spike nothing has been going on in the market it's just flat there's no reason you should have stopped out and you got stopped out if that happens call your broker ask what happened why did you get stopped out and and i've had several trades that the broker has reversed because it was an erroneous bid or something weird happened in the market so at least if that does happen call your broker but know that there are things that can happen that will trigger your stop uh when you may not want it to be triggered or it doesn't make logical sense because nothing's going on in the options market that would cause a stop to be triggered so it's something else going on then another way to set a stop is using a stop limit order and on a stop limit order you set the price at which the stop triggers and you usually do that for setting it at three times the initial credit and then you set the maximum price you're willing to pay to close so you give it a range from the trigger to your limit price and i usually set the limit price for at least 20 to 40 cents or more and i use the bid ask spread width and usually multiply that times two to come up with what that spread with ought to be between the trigger and the limit price that's one way to do it also in higher volatility markets that may need to be a little bit wider the danger of using a stop limit order is that in a fast-moving market the price can blow right by you let's say your stop triggers but the price is well beyond uh 20 or 40 cents more let's say your your initial credit was 50 cents you set your trigger for a dollar fifty which is three times the initial credit and then you'd set your limit for a dollar seventy twenty cents more than than that three times initial credit and but in a fast-moving market that's that option price quickly goes to two dollars or three dollars and your order doesn't fill because you put it it's a limit order you're only willing to spend this much for it and and it didn't fill so i do not recommend using stop limit orders unless you can watch the market and if you can't watch the market i recommend using the market stop orders and and just deal with the the rogue trades that happen that can trigger your stops um another way to to use a stop if your broker has this option is is setting a stop on a condition or conditional order for a stop um you would exit the short leg with a market order when the stock hits a certain price and this this means you're going to have to estimate what the option value would be at that point but that's better than having no stop at all so it still allows you to uh roughly estimate what your loss might be and set a stop for that when this when the stock hits this line in the sand you're out and i think that's a good alternative to a market stop and a stop limit order because it avoids the uh rogue trades of the market order and it avoids the non-fills of the stop limit order so explore that uh as a way to set stops and uh play with that if you if you don't know how to do that on your brokerage uh contact your broker and have them explain it and uh but that's a that's a real good alternative to a market stop or stop limit and then ways to manage the stops you can put a separate stop on each short leg of your trade like if you have call and a put spread you can place a stop on the short leg of the call spread and a stop on the short leg of the put spread and that generally will get you out faster than setting a stop on the whole spread and then you can decide what you want to do with the long leg as as we talked before i think especially in a fast-moving market that's a good way to get out i think it's harder for brokerages to fill uh spread orders than just a single leg order and a lot of brokerages i think i mentioned this that they only allow setting a stop on a single leg they don't allow stops on spreads so make sure what your brokerage allows then you could also set a stop on the whole spread on each side i might do that during the you know in the morning and up till the middle of the day but as i uh as you approach the end of the day there's a problem with doing it this way because sometimes that long leg has so little value or there's just no bids for it then your spread isn't going to fill if there's no bids for that long leg so it's just another reason to generally set stops on the short leg and then another another way you can trade is set a stop on the whole iron condor if you've entered both sides you take the premium you've received for the whole iron condor multiply that times three and use that to exit the hole all four legs of the iron condor downside of that is it's much harder to fill a four-legged trade than a single leg again so but it might keep you in the trade longer but your loss is going to be larger because you're stopping out on the whole iron condor the whole credit so keep that in mind if you trade that way then i'm going to be going over some trades and i wanted to show a diagram of how i typically diagram a trade and i i will draw these lines on the screen as i'm trading and as i enter so i can remember or just take quickly take a look at the stock stock chart and see where i entered and what the stock movement has done since i entered and uh then where i exit if i take it to expiration uh i leave it on this red line is my short strike the black arrow is where i entered the put side and the red line on the top side is my short strike on the calls and where i entered the calls and then i'll draw in an approximate break even line for the puts it's not exact because you know volatility comes into play uh theta comes into play but there's a lot of factors delta comes into play anything that affects option prices but generally if i'm above that line somewhere i know my trade is negative if i'm well below or between these two blue dotted lines then usually my trade on both sides is positive and i can just leave them both on it just gives me a quick visual reference to see how my trade is doing i'm a visual person i i was an architect in my career so i love diagrams and drawing things and thinking about things visually so this is this is what i've developed for for this but um so like i said you can tell when a trade moves against you uh it doesn't this shows that it doesn't take much for a trade to go against you early in the trade and if you consider anything above the blue line as negative p l and anything below that line or between the two blue lines as positive b and l then that move you may show slightly negative after you first entered the trade but then after a while things settle out and your trade is positive now notice that the move here is even higher the stock price even higher toward the end of the day here but it's well outside that profit line approximate break-even line and you've you've definitely got a profit at that point you it may take a slight dip there but so close to the end of the day probably not and your trade expires worthless so i use these kind of diagrams uh to help explain what's going on in the trade and uh these will these will that just knowing understanding those diagrams will help you read how i'm showing these trades so i've got three examples of recent trading days and i'll show several techniques for trade entry and management and show you how each of those works and what i do and i just want you to be aware that there's more than one way to to trade these and uh that i don't think there is a best way there are pros and cons to all methods so just you know be aware of that and find something that you that seems to work for you or that you just naturally like that way to trade and that's fine and then again always keep losses small and on the following pages the prices and statistics are hypothetical and don't reflect slippage liquidity commissions they're just purely the option prices for these trades so be aware of that so i'll give you a little context the s p on the prior three days had taken a dip and this chart on the right well sorry this is a daily chart on the left it had been moving up just a bull market vix is around 18 18 and a half and we're you know we may be in for a little downturn i don't know but it seems to be topping out here and then the prior day which is this red candle we did get a drop but then it it came back up uh after about uh 11 a.m and these times are central time uh that's i'm in dallas and that's the time zone we're in so that's what shows on my screen so um yeah so about midday it starts moving up and at the end of the day it uh stops at about 41 67 and so that's the what happened the prior day just as a some context so the this day that we're gonna trade it's a zero dte trade and the market at open jumps up uh looks like up about 10 points and um and then it pulls back a little bit so we opened at 41.75 we went up to uh above the prior day's high the prior day's high was 41.80 so that generally bodes well for kind of a bullish market it you know we already were in a bullish trend we're in a bullish overall trend the trend at the last half of the prior day was up uh we the prior days closed was 41.67 we opened up you know well above that and then went straight up the prior day's low i also marked on it here at 4128 again for context just so you're aware so there's several approaches to entering i could enter both sides right at the open or i could wait a short time to see what happens at the open and then leg into the trade or i could wait even longer if i'm still uncertain after waiting a short time i may wait even longer and see what happens and then leg into a trade none of those are wrong moves they're just different approaches so example one i'm going to show a trade where we enter both sides right at the market open and so i you know we pop up and i am able to get in i enter the 4210 short strike on the call spread and the 4140 short strike on the put spread and i show the premiums for those spreads we're collecting an initial credit of 95 cents total credit so what's the next thing that i do anybody know is uh what i figure out what the stop on the calls need to be so i take three times the initial credit of either the spread or the short call and uh in this case i use three times the initial credit on the short call so i put a stop on those calls at 1.65 and then i figure out what the stop on the short puts should be and that would be 73 times the 75 credit on the short puts so my stop on the puts is 225. so if the price on this option goes on the calls goes up to 165 from where it currently is at 55 cents then i'm out of those calls and same thing on the put side if that price goes up to 225 i exit those uh short puts so you can see i've got some room here uh about 30 points on the call side and a little bit more 40 points on the put side so it seems like a nice trade to me got plenty of room so let's see what happens during the day so right after this jump in the opening we get a pullback and it goes up a little bit and then we get more down move so from my trade entry where the stock was about 41.85 or plus or minus we got a down move of about 10 points and i got stopped out on the short put so i i have put all that information in here and because of that loss i uh i now have a loss on those puts of a dollar 50 and if i close the whole position right now i'd be at a 55 cent loss uh if i close my calls and close my puts i'd be at a loss of 55 cents but i've got some uh alternative moves here so let's just see what happens so the market continues down so it's a good thing we got out of our puts and but we went down we jumped down again to almost 41.60 and then we have a series of just green candles it starts going up so i kind of think that that might be a low of the day or at least a temporary low and so i decided to re-enter on this uh up move and i did note that the value of the long calls got up to a dollar 20 on this move and so um i decided to go ahead and sell my calls because i'd made good money on those so i sold those puts i sold the puts that i bought earlier the long puts for a dollar got a dollar credit i i didn't quite get out at the low because i didn't know that was the low until after these green candles came so and then on the move up i decided let's just re-enter the put side so at this point i sold the 4125 short strike i went further out of the money and um sold that put at 75 cents and i entered a new long and so i've got all the numbers here you can go through there so if all works out if i closed everything now i'd only have a loss of 15 cents which isn't bad if everything works out so let's just see what happens i and the stock just continues marching up which is good for our positions so my call sides are doing good we're well outside the break even line there even though the stock is moving up theta's working in my favor and because the stock is moving up and theta i've got a good gain on my uh put side too so if i close the position the whole position right now i've got a profit of 25 cents so so there's no reason to get out of that trade though i just where it's performing nicely so i'll just stay in that trade see what happens and the stock goes up for a while and at the high of the day um the the short calls were worth 30 cents the long calls were worth 10 cents so 20 cent trade you can go back and compare that to the initial credit i don't recall what it is but i think we're still making money on that trade and then the puts of course are doing well so um if if i close the trade now i would have a gain of 35 cents for the whole position if i closed it at this point where at 12 30 in the afternoon after this pullback uh from the highs and it's just right in the sweet spot which is nice and i'll just leave the trade on so the rest of the day goes very well everything expires worthless and the net profit at expiration is 45 cents so let me go back right quick and see what the initial credit was initial credit was 95 cents so i was able to recover about uh about half of that trade even though it went against me so when i closed it i got a profit of 45 cents so pretty good for having a loss in the middle of the day so another way to trade this is legging in within 15 to 30 minutes of the market open and try to avoid those those spikes at the at the market open and this this is a very typical day for what's going on in the market right now uh and we we're often seeing these 10 20 point moves right at the market open so uh this one may have some possibility we'll see how this one works out so we leg in within 15 to 30 minutes of the market open we're still trying to collect some of that premium but we're giving ourselves a little time to see what direction is this market going to go so uh at this point we wait until this early morning volatility and then on this move up and then we start seeing some red candles i decide to go ahead and enter the calls so i collect 35 cents on the call side and then on this little pullback and then we start seeing some green candles i decide to enter the puts so here i collected a total credit of 75 cents if you remember that other trade where we entered right at the open we collected 95 cents on the opening now we're only collecting 75 cents but let's see how this trade goes we've got a 4210 short strike and a 41.35 short strike on the put side [Music] and we'll just see what happens so this trade also goes against us with that drop the same drop that affected us before but we cut because we got in a little later we got in at a little further down point on the stock and we still collected a good premium we are at a loss but we have not hit a stop order so our stop if you look it would be three times the initial credit on the puts let's see let's go back trade so it'd be three times the initial credit on the puts which would be about uh a dollar a dollar ninety uh i think somewhere around their dollar ninety five and um so we just we just eat out at the worst point those puts were a dollar ninety so if the stop was set at 1.95 it didn't trigger that stop the long put was 90 cents so it would have had some good value and um but the stock retraced after that so that was kind of a big sigh of relief and so if we close right now where the trade is we would be down 30 cents but we didn't get stopped out and let's see how the rest of the day goes same day so 60 minutes later uh trade is doing well uh stock has recovered and it's kind of in between our break evens and if we closed it right now 60 minutes into the trade we've got a gain of 30 cents and two hours into the trade the closest it got to the calls was uh here and the short calls at the high of the day are 30. the long calls are 20. you know we we still have a profit in our calls um i'd have to go back and look at the slide to remember what we what we collected on those calls but the total gain on this trade right now is 45 cents if we close that position right now which is that's the gain we made all day on the other uh strategy where we entered right at the open so we should unless that stop continues up and the call side goes against us you know if things stay in between the spread even we should do pretty well so let's see what happens the rest of the day and yes it does that was the high and uh it's just continuing to be kind of range bound and between our break evens so if i close the trade right now i'd collect 60 cents and if we take it to expiration i get the full profit of 75 cents on the trade so let's see what happens with a third way to manage this this would be lugging in within 60 minutes of the market open so waiting even longer to see what happens and there's no no problem in doing this often this helps out and you're able to get a better gauge on what's going on in the market so let's in this way i'm logging in within 60 minutes so at about 35 minutes into the market after the market opens we got this big drop on the puts but we started getting some it's like it was hitting resistance and i didn't even look at what a line of resistance was i could just tell from the candles that it's not acting like it wants to keep going down in fact there for every red candle there's an opposing green candle the greens seem to be winning so i decide to enter my put at that point so i entered the 4110 short strike and then um and and i entered the puts for 50 cents and then it goes against me a little bit but not too bad at the worst point the short put was a dollar i had i had sold it for 90 cents so it wasn't too bad the long puts were still at 40 cents so we're only 10 cents under water on that trade and then it turned around too so we got all these green candles and it seemed to kind of settle out and maybe it wasn't you know we got this red doji there it seemed to kind of settle out and just go sideways so i decided to enter the calls at that point so for the calls i got 30 cents and sold the 4200 strikes so you can see i'm a little closer to the money on the call side than i was in the previous trades and i think i was a little farther away from the money on my put spread so it just shifted the whole trade down because that's what's going on in the market so and for this trade i collected 80 cents so let's see what happens the rest of the day with this trade so it looks like it continued up but not not too badly um the current price for the calls it just was holding steady at 30 cents i think that's what we sold it for and the puts the current value for the puts was 15 cents so if i closed it right now 30 minutes after entry i've got a gain of 35 cents which is almost a 50 profit on the total initial credit of 80 cents so not bad for 30 minutes into the trade and we'll see what continues to happen it keeps moving up but those calls uh just maintain their value they're not decaying because because of that up move but they're not losing either and the nice thing about a call side moving against you a little bit is you get a reduction in volatility often when that happens and so the calls often will do this they'll just maintain their value even though it's moving against you they're not losing money so that's that is volatility helping your trade so now at 60 minutes i am at p 50 or 50 profit and so i if i closed it right now i'd have 40 cents profit after an hour in the trade or i'm sorry 40 cents profit after an hour in the trade yes so we'll see what happens the rest of the day uh high of the day i was just a little bit underwater but not bad i think we sold that for 30. it's now worth 35 so we're a little bit underwater but not too bad the puts are decaying nicely and we still have a gain of 40 cents even with that up move and a little bit of down move in the call we'll just see what continues to happen so the rest of the day just goes sideways more theta decay happens and we're just doing a nice job of collecting premium so if we closed it right now it would be worth 65 cents and then if we take it to expiration we get to keep the full profit at 80 cents so that gives you three examples of how to manage trades and what can happen what the dangers are of entering early when the market opens or later you don't collect as much premium you can collect you know if we get a down move like this you can collect some good premium but you know notice the highest premium was when you entered it market open and but you take i think the danger of getting stopped out is greater if you do that and that's the way the market is behaving lately if and it's fine to just enter and take your chances and rely on the probabilities the options but i think you can manage it a little bit better uh this is a little more discretionary because you're you it's a judgment call that your uh our judgment uh decision on using your judgment of when you're getting in and and how you're managing this so you may collect a little best profit but you avoided a stop out so you save some commissions and slippage there so that's that's and all three are acceptable ways of managing this trade just with slightly different results but very similar results so i'm not recommending a specific type of entry even though one of these you know the 80 cents legging in within 60 minutes of the market open got the highest final p l but there are pros and cons to that sometimes that that premium decays even faster and you risk you know getting in at 65 cents or 50 cents later in the morning so there are some downsides um and this is just to show you variations on how you can enter these trades and there's often better premium at the open which can sometimes prevent you from hitting a stop that's true because it takes a bigger move to go against your stop but with those larger moves at the open they can often hit your stop as the example showed so um just be aware of the pros and cons have your stops in place you know that's the the first thing you do after you gotten into the trade is set your stops and um and then just let watch how things play out so the following study looks at um examples of how decay works throughout the day and i had shown this in a previous uh slide or a previous presentation the one in august and i'm showing it again just as a refresher i'm working on a bigger study to show how how decay works throughout the day on closer to the money options and further out of the money options it's a question i have and curiosity often drives my back test i just want to see what happens don't know the answer yet but i'll share it in a future video and i believe theta is a straight line decay throughout the day but premium the premium or the extrinsic value can be influenced by the other greeks so the the value of that decay can change um but uh i'd say this is the value of a fairly flat day where premium is just decaying and like i said before the early moves can can go against you like here this trade was negative on this move down but on this move down it was the same it got to the same level but that it was positive the trade was positive at that point and late the day those moves don't hurt you as much i think i've covered this but this is the premium decay that occurred on this trade and when i entered i waited to enter i entered the puts calls on roughly the same time because it just seemed a flat line after that and we had this big move there was nice premium after the big move and that can sometimes be a good time to enter after you've had a big drop and that's what i wanted to do by entering here is is jump on that premium before that started decaying so let's see how different with the spreads decayed through the day and this is every 15 minutes and this shows you what was going on with the price of spx the red means it was a down move and green means it was an up move so you can see there was this down move early in the day and then little little down moves a little later and then an up move toward the end of the day so the left side is selling delta five puts the right side is selling delta five calls you can see how a five wide spread it was the value of that on a percent basis just decayed slower than these tighter or wider spreads and that's because it was hanging on to the value of that long put in the spread so the color coding shows you um you know the white is it was collecting between 0 and 49 percent of the initial credit you're collecting a profit of 50 percent or you're hitting 50 profit wherever there's an orange and then the blue you collected about 90 90 of the profit and the red you'd collected 95 percent of the profit so you can see on this down move um both the foots and the calls were kind of hanging on to their profit i mean hanging on to their value weren't decaying very fast in the first 30 minutes or so uh and then around 10 o'clock uh trade entry was at 9 15. at 10 o'clock you started seeing a 50 profit level on a naked option 100 wide spread and a 50 wide spread uh 25 wide spread you weren't you weren't you were almost at p50 but not quite and uh same thing on the call side they were decaying you were hitting about 50 profit or greater uh well that was at 9.45 and that that's a little earlier than the puts because the stock was moving down so as the stock and i'll go back a slide so then after this down move the stock recovered went down again and then just went sideways the rest of the day so you can see that in the option prices and as they decay so the the puts decayed much faster than the calls and i think that is because of this up move you know the calls were hanging on to their value as the stock price was moving up whereas the puts were losing value quicker and then later in the day that's going to have less of an impact because a lot of decay has already happened but you can see the put side we hit 90 percent of the initial credit uh had had decayed by 1145 in the trade on the put side and it was generally faster and about the same for uh you know all of these spreads the percent decay was about the same on a 25 wide as it was on a 50 wide 10 10 what point widespread was a little bit slower a little bit back and forth close to 90 profit but sometimes going back but that five wide spread just hang on hung on to its value until the very end of the day the last uh 30 minutes of the day it finally gave up uh its value and um and and expiration that all of these expired worthless but that just shows you the difference in the decay value and the same thing on the calls because that stock was moving up um on the call side it tended to hang on to its value a little bit longer because there's the probability that those calls will keep moving up and uh that decay is not going to happen as fast sorry as it as it would on the puts because of that up move and so again the you were collecting 50 of the profit on a pretty consistent basis on the from 25 widespread and wider but on the 10 point and five point spreads it just was off and on sometimes you're you're collecting 50 for hitting a 50 profit and sometimes it bounced back and be less than 50 percent on both of those five and ten wide spreads and again that short the five wide spread just hung on to its value until the end of the day uh whereas on the calls um uh it was uh just taking longer but decaying a little faster and it's interesting that these the hundred point spread and the 50 wide spread even decayed a little faster than the naked option in that case and you got this uh red which is 95 of initial credit because of this let's see what time that was um that was 400 to 14 15 oops sorry don't have times but uh if this is 1500 maybe 1413 so it could have been because of this down move um the the let's see yeah by that time and and that down move that it just those options were starting to decay faster then you've got a little bounce at the end of the day and i think that's what this is that it wasn't 95 profit but with that bounce up it lost some of that profit and then at the end of the day expired worthless so that's that is just one example and i'm working on a back test with multiple uh values looking at a number of trades because i'm real curious to see how various widths of spreads act during the day to come up with a definitive answer to people that that asked me the question why do you trade 25 wide or 50 wide instead of five wide you know i hear so and so recommends five wide or another guy recommends 10 wide well i i want to know for certain based on data not just someone's opinion and it could be that you know your your actual risk if you take the width of the spread less the initial credit is going to be less on the on the narrower spreads but with the stop i think basically your risk is the same on any of them it's going to be you know whatever you set that stop at and it would only be taking the trade to expiration and without a stop that you would have the risk being the width of the spread so um then i've been working on a study let me make sure that's uh yeah so i've been working on a study uh that's similar to this where i rank uh trades by stop multiple uh and these are i look at spreads compared to a stop on a short leg only does a spread stop out slower or faster than a stop on a short leg only does it make a difference and numbers in green means it stops out slower than a stop on the short leg only and vice versa numbers in red means it stops out faster and these are tested in various volatilities and i have this is a sampling of trades um and this is example of one trade so i have in this study this was trade number 538 so i could keep track of it this is comparing is the spread better five wide spread better or worse than just trading the short leg only like what was the stop multiple and all of these trades got stopped out by the way i was looking at all losing trades uh in this study so all of these trades the short leg uh like at this point was a value of one the short leg was two times the initial credit at that point three times the initial credit at this point seven times the initial credit at 11 35 so you know you can see the multiple on that short leg and then i looked at the multiple on the spread and this was five wide spread and what the difference between the spread and the short leg so this was an improvement of one multiple uh over that short leg so you know here the five wide spread was it was not in a loss situation when the 50 wide spread was and the 25 widespread was but the five widespread was not in at that stop multiple yet so um then interestingly enough as time goes by the 25 wide and the 50 wide are actually worse off than just the short the molt stock multiple on the short leg now this does not take into the account the premium of the long leg on the trade um you can i think i've got it here you can see that but i'm just looking at the premium on the spread 25 wide spread and the short leg only just to compare the decay uh on those and so in general the wider spreads in this example and in this example you'll notice vix was at 46. so this is a very high vix level and the uh at a very high vix level that tighter spread the five wide spread does act better i mean you're looking at a multiple uh here of five and uh whereas the uh 50 wide spread and the short leg had a stop multiple of seven it was seven times the initial credit at that point so i say it's two times stop multiple better on the on the five wide spread so the green just means it's better the red means it's worse so i summarized a number of trades looking at that on this next chart and you can just at a glance see that uh and here was uh i believe this was this trade that we were just looking at so you can see that the five wide multiple the blue is a five wide and all of these the yellow is a 25 wide and the red is the 50 wide and we're just looking at oops sorry we're just looking at whether it performed better or worse than the stop on a short leg so at higher multiples i think that long that closer long leg of the five wide spread helps you out and that's a good reason to trade these tighter spreads in high volatility however the opposite is true on the lower volatility and kind of medium volatility that the 25 wide and the 50 wide i mean sometimes the tighter spread is performing a little bit better but they all they all generally do a little better than trading on a short than just trading off the short leg in a spread so that might be a reason to put a stop on a spread instead of a stop just on the short leg that you'd get stopped out uh less often now in a in a low volatility i don't know the jury's still out on that one you know the the narrower spreads don't perform better until you get down uh i think this is minutes in trade so it takes a while each of these is an individual trade that i looked at a trade that went against you and so in the middle range values and let me show you this i organized this about vix level so on the left hand side of the chart the vix is from 11 to 17 and then the middle of the chart is 17 to 25 and the right hand chart is 25 to 45. so um you know i'm looking at can i discern any patterns and and generally i think uh you know spreads do better than than just uh putting stops on the short leg in middle range volatility but as you get to higher volatility man those tighter spreads can really help you out in lower volatility i think the the spread if tighter spreads perform actually worse than the narrower than the wider spread so you can see the five wide spreads are hitting the stop faster than the short leg where the 50 and 25 wide aren't hitting the stop faster than the short leg so in a low volatility environment which is where we are right now a tighter spread just doesn't make sense uh to me personally when i see this data and these are i think there's just 36 trades in this study so it is a small sample but it gives me a general idea of what's happening more more to come on this i'm i'm still working on this and um so this this was the summary a stop on a five wide spread performs worse on a stop on the short leg and lower volatilities it seems to perform about the same uh on a five wide is 50 or 25 i mean they're just kind of random stop outs in there random performances but definitely in the high volatility levels five widespread works great because of that long option being so close to your short option so and this for those of you who want the pdf file just email me uh and i'll the email is at the end of the file and i'll send these to you and i included these close-up shots so you can look in detail if it's hard to see these other slides you can just look at this a little closer so the takeaway summary is that we should trade wider spreads in lower volatility markets and use a stop on the short leg and in trade narrow spreads and higher volatility markets and uses stop on the whole spread so and as i said we really need more data but that's generally what this study is showing and then then i did another study which i'm looking at um again the stop multiples let me advance yeah this is trade showing when a stop out would occur and the lost multiple uh comparing uh 50 wide uh 25 wide and five wide spreads in various volatilities so just looking at when does a stop out occur how fast does a stop out occur comparing the various widths of spreads so again the the left chart is lower vix levels the middle chart is the middle vix levels and the uh higher vix levels let me go back to this so in this i'm just looking at um comparing uh multiples like here you only have a one times loss and here you already have a two times loss on the 50 wide spread so you've got a two times loss on the 25 wide spread and you've got no loss and a one times loss on the tight spread again this is for the vix level of 45 and here's the trade date and what the premiums were and strikes and all that so you can look this up for yourself if you want um and so this test is just looking at really these red and green lines to see red means it stopped out faster green means it stopped out slower so um and and in this case just the value of the red tells you it stopped out uh faster so uh in and i'll show you on the next slide uh to me it seems like the mid and lower range volatilities hit a larger loss multiple uh than higher uh volatility trades so um like the you hit a higher loss multiple faster than you do on these higher volatility days which is really interesting you you know this a lot of these trades were from that uh march april period in 2020 it's interesting you didn't hit very high you know loss multiples there was a few random high ones in there but you hit the higher loss multiples uh earlier in lower volatility trading and um and then you can compare a 50 wide to a 25 wide to a five wide spread and there doesn't seem to be much difference in when you hit that loss multiple and um and then the short leg only is is right here so you can see generally the short leg if you put the stop on the three times the initial credit of the short leg versus three times the initial credit of the spread you're still stopping out at about the same rate so i think uh i used to think that you could put a stop on the short leg and and get out slower than you would on a spread because the value of the spread was less but that that is not true this study kind of shows it that the stop out rates are generally about the same level across the spreads on each trade so again you can look at these in the pdf file and and find out or just do a little more studying of these on your own and look at what happens if you don't use a stop i mean some of these trades get up to uh you know 18 times the initial credit that's why you don't trade without a stop like you think these trades are going to turn around they're not just remember these 18 times the initial credit that they they regularly get up to i mean these are these are just a few trades here but it happened frequently enough that it happens believe me so don't trade without a stop so the takeaway on this is you know this is limited data but we should be more cautious in lower volatility markets that those trades can go against you faster when we're collecting less premiums and and stop outs happen slower on wider spreads and that i may have that wrong in there i think we're collecting less premium in the lower volatility markets so you're just your stop outs are happening faster higher volatility gives you extra premium and that protects you from the higher loss multiples and stop outs happen slower on narrower spreads but more data is needed for a definitive answer but that i think it just gives us hints of things to come in further studies and then i have a few uh questions i always get asked on these uh trades and my cat happened to walk in so i've got to move him and that's charlie i always get asked you know can i trade this strategy on one dte tuesdays and thursdays and just use auctions that options that expire the next day in my experience options that you enter on tuesdays that expire on wednesdays and thursdays at expire on fridays they work much more slowly or decay much more slowly than on one dte you they can work if you get a good directional move in your favor like if you see a big move that that's coming or where we gap down and it looks like the market's just gonna head down be a good day to sell calls close out by the end of the day and and take your money and run it it doesn't happen very often but like today it happens to be a tuesday tomorrow is the fomc meeting i guarantee you not much happened in the 1dte options today because everybody's waiting on what the news is going to be from the fed so there just is not much decay on tuesdays and thursdays there are options that expire the last day of the month and these are not monthly options they're i don't know what to call them but quarterly options let's say and they expire on the last day of each month and sometimes that is or sometimes due to a holiday a zero dte trade gets a day gets moved to a thursday those days are okay to trade zero dte trades that's fine as long as the options are expiring that day but i've i've basically given up trading on one dte because it's just iffy if you're gonna make any premium at all and um if you think about it uh you think let's say there's uh i'm just gonna ballpark it 30 hours left in a in an option when you enter say at nine o'clock uh on on tuesday and they expire at the end of the day on wednesday you know that that that six hours of trading is only one-fifth of the value of that option the zero dte those six hours are 100 percent of the value of that option so if if theta is is roughly linear i don't know that it is but if theta is roughly linear uh on these days theta decay then um then you're getting just the proportional decay on a tuesday or thursday is just much less than it is on a zero dte so use that information as you wish then can you trade the monthlies on thursday they expire at the end of the day on thursday that's the options that expire the third week of every month and i would say they expire at the end of the day however they don't settle until the next morning so you do not want to let those uh go to expiration or go to the end of the day without closing them out because you you risk having an overnight gap up or down affect your the value of your options those options don't settle until all the stocks in the s p open the next day and very often your broker will tie up those that buying power all day long on friday until everything clears at the end of the day friday so if you trade those thursday the am expirations is what they're called because they expire friday morning the monthly options uh i i just don't recommend trading them there's a lot of risk in those they they don't decay well uh there's they they hang on to their value just like 1dte options do and you add the risk of of that overnight exposure if you don't close them out so be aware of that i don't trade them and i i don't recommend people trading them i've heard of all kinds of difficulties that people get into by trading them so another question i get is can i take profits at 50 percent rather than taking the trade to expiration i say no to that question because you're changing the relationship between the size of your win and the size of your loss and yes you might have a few more wins taking your trade taking your profits at 50 but i don't think it's going to be enough to compensate for your losses are going to be four times the size of a win so even though let's say 80 percent of the winners uh if you make a thousand dollars on each winner and you have eighty percent win rate and you take your profits at fifty percent you'll be making forty thousand dollars and you only have twenty losers but your losers are two times the initial credit so 20 times two times a thousand is forty thousand dollars and you basically spend a whole lot of effort to just break even after a hundred trades so the the ex the probabilities of those trades working you can this is an expectancy model and you can see that positive expectancy is not there if you consistently take profits at 50 percent now i will say that sometimes some squirrely things may be going on the market you're not certain what's going on it's fine to if you've got 50 it's fine to get out just do that occasionally don't do that every trade and and you'll do fine so um that's a little bit about that and then some resources uh i'm one of two administrators and several moderators on the tastytrade options group on facebook this is a really valuable resource and if you're not already a member i recommend it um we we try to keep things civil uh we've got a lot of great traders in that group a lot of experienced traders and there's quite a few people who trade zero dte options and a lot of them use my system so if you have questions about it you can ask them there or people are often posting information about that or as i complete studies i'll post my studies on that facebook page so you can go look in the file section for other studies that i've done in the past and you know we post what's going on in the market and what's working and what's not working so you know if all of a sudden you're finding you're getting stopped out you know right at the open very frequently you can check with others is this happening to you as well or is it is it something about how i'm placing my trades and you know you can kind of crowdsource what's going on and and find out more and then uh you can connect with me via facebook messenger or email uh there's my email i love questions so feel free to email me and and if you'd like a copy of this powerpoint presentation uh just let me know and i'm willing to share it and uh and i'll i'll send you a copy of this and i'll usually include copies of of the other the august presentation as well which is a little more thorough presentation uh of the strategy itself this this presentation covered more nuances than the prior presentation which was really just focused on the basic strategy this presentation focuses a little bit more on how i trade it and a little look into the inside of how this this strategy works and uh some of the variables that you can consider in your trading so i want to give a shout out to optionnet explorer i use that a lot in my back testing it is not an automated software i do have uh some sources for automated uh back testing this one though is what i use to run a lot of these option data where i'm looking at you know every 15 minutes what's happening to the trade and stepping through the trades and seeing how they perform i think back testing learning how to back test was one of the things that in addition to joining that facebook group those two things made the biggest impact on my trading i met up with great traders we could challenge each other's ideas and exchange ideas and learn from each other and then being able to back test rather than you know testing while i'm trading and losing money on some of those ideas i can go back and test ideas and see how they would have performed over time and then pick out the ones that perform the best and then start trying those in live trading and so it's just and also uh optionnet explorer includes the greeks for intraday data which is nice um it's much easier to use than uh thinkorswim's on demand i think the data is more accurate than the on-demand i've heard a lot of people complain about the accuracy of the on-demand data and and then optionnet explorer also has excellent risk graphs and trade analysis tools and you can look into that it cost approximately 60 a month it is a british company so they charge you in british pounds but it's a good software and then here's the presentation i mentioned at the beginning that's a just search for that on youtube and then email me for copies of the slides and that's it so thank you very much for attending and uh i'm glad to share these additional tips with you and feel free to email me with questions or comments i love to hear from you and i try to reply to everybody within a reasonable amount of time so you will get a reply uh at some point sometimes it takes me a while but you will get a reply but i love this strategy i love looking into into it i like to hear how different people are trading it and um and i love people's questions because they give me more ideas on things to test or they make me think of things in different ways and you know they challenge how i'm thinking of the trade and challenge my assumptions so like i used to recommend trading 50 wide uh people challenging me with that caused me to look into that further and realize hey 25 wide works just as well takes less buying power i think that's a little bit better and as i continue some of these studies on stops and various spread widths and various fix levels you know i may refine the strategy even more after that so i'll always share what i'm finding with you guys and i appreciate all the emails i've received uh on prior videos and i look forward to hearing you regarding this video so thank you very much and have a good evening or rest of your day thank you

Channel: Tammy Chambless 0 DTE Options Trading

Views: 15,596

Rating: 4.9276772 out of 5

Keywords: Tammy Chambless, 0 DTE, Options Strategies, SPX, Iron Condor, Credit Spreads, Trading 0 DTE, options education

Id: cqnL6-44ZOk

Length: 90min 49sec (5449 seconds)

Published: Wed Jul 28 2021