Weekly Options Trading Earns Him $2,500 Every Week (but he's missing something huge)

so I recently spoke to a trader who's currently making $2,500 a week trading options I'm the head options trader on our options trading desk here at SMB capital we actually talk to traders like him all the time most retail traders would die to know how he's doing this and I'll show you that shortly but you need to stay with me on this to really understand the full implications of what he's doing he's missing something huge so stick her out because it's important [Music] hi I'm Seth Freiburg and I'm the head trader of SMB capitals options trading desk SMB capital's 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 you want to click our subscribe button right now so that you don't miss any of our free trading videos produced for the trading and investing community ok so I was contacted a few weeks ago by a very diligent and sincere trader who had developed the technique that was netting him $2,500 a week using a very simple technique that I'll show you in a minute he was applying for a spot on our trading desk and so we were having a serious discussion which involves me probing about the risks and the rewards of what he was doing and it was clearly evident to me early on in our discussion that this trader was an honest person excited about the trading approach that he had felt and which was in fact bringing him $2,500 a weekend income which is awesome so let's give you the basics of what he was doing and then we can jump into the meat of my conversation with him which was very important in order to do so I need to make sure you understand the basics of options for those of you who are new to options trading you'll need to listen closely for those of you who are experienced traders this will be quick and then we'll jump into the core of my discussion with this trader now almost all of you are probably familiar with equity options we're a call buys you the right to buy 100 shares of a stock at the strike price of that option any time before the option expires and a put option entitles you to sell 100 shares at the strike price of the put before that option expires but there are also index options which works similarly to equity options except that there are no such thing as 100 shares of an index like the S&P 500 you can't really buy or sell 100 shares of an index but what you can do is get paid in cash $100 per point if the index expires above this strike price of an index call that you buy or alternatively you'd be paid $100 per point for each point the index drops below the strike price of your index put so for example if an index is trading at 1400 and you buy the 1410 call if the index goes to 14 team you'd receive $500 in your account if the index closes at 14 10 or lower your call expires worthless on the other side of the ledger if you buy a 1385 put and the market sells off to 1375 you'd make a thousand dollars but if the market just sold off to thirteen eighty five or higher the put would expire worthless so those are the basics of index options and remember you can buy options but your broker will also allow you to sell options as well and your broker role allow you put to put together combinations of options in other words options strategies that involve both short and long options purchased in a way that's advantageous to you as a trader there are SPX options expiring all the time but what this trader does is he focuses on the Wednesday and Friday expirations of SPX options and he does this pretty much every week so what he does is to execute a trade called an options terminology a credit spread each week in which he sells a put option in a certain distance below the market and then buys in the same expiration cycle a put option a little farther below the market than the put option that he sold so in a minute I'm going to be showing you the details of how this trade works and then you'll be able to understand the critical conversation that he and I had about the nature of this trade and the proper mindset that he'll need to trade it before I get into this though I wanted to mention that we're currently running a two our free intensive workshop at the moment so if you'd like to learn three additional real-world option strategies that our traders use including a really simple and effective strategy that some of the greatest investors in the world like Warren Buffett uses 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 then you should check out the free options class that we're currently running just go ahead and click the link that should be your peering now at the top right corner of your screen that will open the free registration page in a new window or you can just head on over to options class com to register for this free intensive workshop it's a rare opportunity for retail traders and investors to learn directly from Wall Street traders but that's exactly what you'll be getting through this free online workshop so click the link to sign up now and don't miss it so now back to this weekly credit spread strategy that this trader was executing twice a week let's break down what he was doing carefully now this traders goal is to bring in at least $25 per credit spread and he plans to sell 50 credit spreads each trade which is at least $1,250 per trade and he does this trade twice a week so he's making about $2,500 a week so let's see how they accomplishes that in this particular recent example and that is by selling 50 of the 2990 puts for $1 38 per contract and buying 50 of the 2985 puts for $1 10 per trip per contract as you can see on this options chain so this traders goal is to bring in at least 1250 each trade when he first initiates the trade now in this case as you can see from the example the traders sold 50 of the 2990 puts for a dollar 38 so the math is a dollar 38 times 100 because he gets $100 for each point below the strike price of 2990 as we mentioned before times 50 because he sold 50 of those for a total cash infusion into his account of sixty nine hundred dollars then he simultaneously pays out a dollar ten per option for protection so if the market really tanks there's a limit to how much of a hit he'll take so in this case that protection cost him a dollar ten times 100 times 50 of those protective puts for a total cost of $5,500 so net he brings in $1,400 for these fifty credit spreads now the markets trading at thirty ten and he sold the twenty nine ninety puts so his short puts the one he sold were twenty points below the market other weeks they'll be closer to the market in some weeks they'll be farther from the market depending upon conditions in the options market so he does the same trade Tuesday afternoon for the Wednesday trade and Thursday afternoon for the Friday trade each week and his short puts will be as far from the markets as he can get and still receive a net of at least 25 cent credit per spread well in this case he actually got 28 cents because the short puts were trading at a dollar 38 and the long puts were trading at a dollar 10 so the net of those is 28 cents and so he got a little more than he would normally get having received $1400 credit for this week's spread so let's see what happened in this case and some things will come clear to you from this example so the next day the SPX index closed at 29 92 meaning that the short put at 2990 and the long put at 2985 will both expire worthless let's try to internalize what that means why did both options expire worthless because if you would call with index options they are what is called cash-settled meaning the options payoff in cash not stock so if a put is below the expiration price of the index then there's no obligation to pay the owner off annex it expires worthless so both options expire worthless and we just pop it the $1400 as our profit so that one worked out pretty well and this guy's been doing this each week usually twice a week all year so that's very impressive if you can reliably do that each week but there's an important point that the trader was missing what would happen with this very same strategy if the next morning let's say after some ominous sounding presidential tweet about China or something scary sounding that the market would gap down and close 30 points below our entry price which was 30 10 now that doesn't happen all that often but when it does let's see what would have happened to his trade in this hypothetical case let's take it option by option now the 2985 option which were long as five points in the money so that one would pay the trader five points times 100 times 50 options that he owns for a gain of twenty five thousand dollars but the 2990 put that were short well we're gonna lose fifty thousand dollars because it's ten points in the money so the loss on that will be double the gain on the 2985 that we were long or fifty thousand dollars and of course we got the original credit of fourteen hundred for the spread in the first place but still if you add it all up the loss would 23600 well he is making about $2,500 a week on this trade except when he loses and when he loses he takes in he takes a hit of 23600 then it will take about 10 weeks for him to get back to break-even and here's the really crucial message of this video how exactly shall we react to this realization well in talking with this trader at first he's sort of protested that he had been trading this for nine months has never experienced a loss and he was careful to avoid overnight situations it could give rise to gaps down but of course the fallacy in that is that you can't predict an overnight surprise so should he just give up on the trade because of the risk despite his outstanding experience with it well that was not the advice I gave him which might surprise you but let me explain my reasoning you see as it turns out if you do the math if you do this twice a week and make 1250 most of the time but four times out of the year you get this total loss you'd still have over 100 percent annualized return on the trade if it happens five times a year you'd make a little under fifty percent a year only if it happens six times or more would you lose money on the trade so the question is how often will on a wednesday morning or friday morning we get a large so off that doesn't come back before the end of the day well nobody knows that intuitively so it needs to be back tested to get a feel for how often these loss events are likely to happen so that he can come up with some final conclusions on what can be expected of this trade in the long term so I gave him some ideas on what back-testing software that he should consider acquiring and asked him to contact me again once he had determined the frequency of these loss events to see if the trade can work over the long term now you can also overlay this train style with indicators and other common-sense factors and perhaps improve your wind rate on the trade but you'd have to subject those two back tests as well obviously so at the end of the day either way the trader has to do some homework and come back to me and then we'll see if we have something to talk about so what I'd like you to take away from today's video is a really important trading lesson if you have had a winning streak on a certain strategy it's really foolish to that that winning streak will continue forever you may have a really great trading idea and it may provide you with an outstanding return even considering the occasional losses but if you don't study it carefully and include the occasional losses into overall calculations you basically have no chance of being a successful trader but if you do your homework and realize say in this case that if the event happens on average less than five times a year you'd make over a hundred percent return then well you might want to take that strategy seriously but you won't know until you do the research and that takes work and study that's the way you'll become a great trader through coming up with potentially great trading ideas and then testing them scientifically to see if your hypothesis was right now just to remind you as I said earlier if you enjoyed this video and would like to learn three more real-world options 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 hand corner of the screen this will open the free registration page in a new window or you can just head on over to options class com to register for this free intensive workshop it is an unusual 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 that link and sign up now and one more thing I'd like you to do is to go ahead and click our subscribe button so you don't miss any of our trading videos produced for the trading and investing community and while you're at it please add your feedback in the comment section for what videos you'd like us to produce next as well as what you found helpful from this video so from all of us here at SMB trade well you

Channel: SMB Capital

Views: 395,171

Keywords: weekly options, weekly options income, weekly options trading strategies, weekly options vs monthly options, stock market weekly options, options, options trading for beginners, options trading tips, how to trade options, trading options, trading weekly, call option, finance, how to trade, online trading, option strategies, option trading, put option, stock market, stock market for beginners, stock trading, trading, weeklies

Id: Dl0O3z_5hB0

Length: 13min 36sec (816 seconds)

Published: Wed Sep 25 2019