Many tend to get into a slump, having no matter how much effort and research on how to stay consistent. This can be really demoralizing and even causes some to give up on trading just because they think they are not good enough.
Seth Frey, head of the options trading desk at the New York City-based top proprietary trading firm, has developed one such strategy. They successfully develop methods to get their traders confident and profitable again, one of them being options-leveraging—a versatile tool that, if used correctly, yields them high win rates.
This article introduces a simple yet effective options trading strategy that will offer a 90% win rate. The strategy, a 10 Delta Put Credit Spread, has been used by professionals and will help you regain your trading mindset while keeping the promise of steady profits.
The 10 Delta Put Credit Spread
This trading vehicle comprised mostly an actively traded option on an exchange-traded fund: QQQ. QQQ tracks the NASDAQ 100 and is made up of a variety of big tech stocks such as Apple, Amazon, and Tesla.
With a 10 Delta Put Credit Spread, traders can get an extremely high probability of winning. The Delta of the option is a measure of the chance that the option will expire in the money, and a 10 Delta only indicates a 10% chance of expiring in the money. Rather, this represents a 90% chance that the option will expire worthless, thus taking a win.
How the Strategy Works
Let’s break the steps of this high-probability strategy into segments:
Breaking this high-probability strategy into sections:
- Selection of the Ticker: The one used here is QQQ. On May 1st, 2023, QQQ was averaging $322.12
- Important to Choose the Choices:
- Sell a put option with 10 Delta. The chance for that option to expire in-the-money is very low. In this scenario, the seller will sell the 295 put option. The chance to expire worthless is relatively high.
- Hedge the position by purchasing a put option with a lower strike price. For instance, the seller can purchase a 290 put to hedge against a more significant potential downside risk.
Risk vs Reward:
- Collecting the premium on the 295 put, the trader collects $1.26 a share, $1,260 for 10 contracts.
- Buying the 290 put at $0.93 a share ($930 for 10 contracts) leaves the trader with a net credit of $330.
The Expiration Day Outcome:
On the expiration day (June 23rd, 2023), if QQQ closes above $295, the 295 and 290 puts will both expire worthless, and the trader will be left to collect the $330 profit. This is what happens when QQQ continues to close above the sold put’s strike price, which is highly likely given the Delta.
What are the Advantages of the 10 Delta Put Credit Spread?
- High Win Probability: Selling a put option that has a 10 Delta would be betting that there’s a 90% chance the stock stays above the strike price, thus ending up worthless.
- Tons of Maneuvering Room: Although QQQ might fall in price, it can easily hang above the strike of sold puts—in this case, $295. As long as the stock stays above that level, the trader still wins.
- Continuous Cash Flow: The trader can establish these credit spreads month in and month out, earning regular premiums. In the example employed, this cycle would be repeated throughout the year, earning the trader $3,850.
Calculation of Profit
For this case study, the trader was successful in all 12 trades over more than 12 months, peaking at almost $4,730. From the returns on investment after following this strategy over the year, the return stands at 81.3%. Such a return based on high-probability trades is impressive and depicts a consistent manner through which wealth can be built over time.
Risk Management and Caveats
Even though this strategy has an extremely high win rate, it does pose some level of danger. Here are the most important points to take note of:
- Only Trade When Bullish: This strategy presumes a bullish or neutral bias with respect to the underlying asset. If the stock is not certain to stay high, such a trade should be avoided because a dramatic drop in price can result in a loss.
- Managing Unfavourable Trades: In a very rare case where the stock ends up closing below the strike of the put sold, it would leave the trader with a choice either of taking delivery of the shares or closing out the trade and foregoing some money.
- Realistic Expectations: Even though a string of 12 consecutive winning trades can and will occur in any one-year period, the practical outcome likely to be reached will probably be between 10 and 11 wins a year, with a winning percentage near 90 percent. Unpredictable market conditions mean that sometimes the losses will not be avoided throughout the year either
Why This Strategy Works
Professional Insight:
The 10 Delta Put Credit Spread is one of those strategies that professionals at firms such as SMB Capital employ because it strikes a good balance between risk and reward. The high-probability success makes it a valuable tool in a professional’s toolkit.
Psychological Boost:
Complacency can be expected when no losses are ever experienced, as traders win 9 out of every 10 times; however, high-probability trades will make a trader more confident, especially for those that have recently found themselves in losing situations.
Conclusion
This is a simple options strategy designed for traders to hit the 90% win rate — the benchmark of building long-term success. Selling 10 Delta puts and buying lower-strike puts to protect the downside generates profits every month, as the QQQ example showed.
However, like any strategy, it must be used at the right time—that is, when you are bullish on the market—and then accompanied by good and meticulous management of risks. This method, when applied by a good trader with proper execution, generates steady cash flow as well as high returns: it is an invaluable tool in any trader’s toolkit.
Add the 10 Delta Put Credit Spread to your trading plan as you move into learning more about high-probability options strategies.