There is no better way to start in options trading than with a high-probability strategy. This will not only help build your account but also boost your confidence. In this video, we will teach you one of the easiest strategies that can yield more than an 80% return on capital, especially in bullish environments like 2023.
Introduction to the Strategy
Mike Bella Fury is a professional trader at one of New York City’s top proprietary trading firms. “Most new guys make the huge mistake of regarding options as being cheap to play big price movements,” he explained. Buying calls and puts has advantages in smaller accounts, but as a strategy, it’s simply not consistent as a means to generate income. Instead, selling options, specifically using option spreads, is a more consistent and predictable income-generating activity. This strategy is simple, high-probability, and highly profitable for beginners.
Seth Freudberg is a head trader at SNB Capital’s options trading desk in Manhattan. He continues, “You can sell options for predictable income every month. This is not speculation in buying options. Stay with this video and we will take you through a high-probability strategy.”
Understand Delta in Options
If you are a beginner in options, you need to know some of the most common terms. Delta is an important metric: how much will an option’s price change as compared to the movement of the underlying asset’s price. The higher the Delta, the greater the chances the option will be worth something by expiration. For this strategy, we will use Put Credit Spreads and will be using Delta as a means to measure our success rate.
An example will be given on December 2022. In this month, the S&P 500 (SPX) index fell by over 25% and began to climb back towards the end of the year as it closed at 40.7657.
You can observe the Delta of a 3775 put option, which was around 10.02%—meaning it had a 90% chance of expiring worthless.
This Delta indicates that this strategy is quite likely to succeed because the likelihood of the market falling below 3775 is low. So, this strategy is built based on selling puts at a strike price that has a very low probability of expiring in-the-money.
The Put Credit Spread Strategy
Let’s break down the Put Credit Spread. This strategy is selling a higher-strike put option and simultaneously buying a lower-strike put option. This creates a credit to your account when the trade is opened.
Example Trade in December 2022:
- Sell 10 of the 3775 puts at a premium of $12.70.
- Buy 10 of the 3770 puts at $1.23.
You take in $12,700 in premiums when you sell 10 puts. When you buy the 3770 puts for $1,230, your net credit is $400. This money goes directly into your trading account.
When expiration approaches, the SPX index closed at 38.3950, which is above the 3775 strike price. This means that both the sold and bought puts will expire worthless. You end up pocketing the entire premium of $400.
This is the heart of the Put Credit Spread strategy: collect premium by selling options that have a very low chance of being exercised.
Monthly Trade Example
Let’s keep this strategy going through January 2023:
- Sell 10 of the 3535 puts at $12.95.
- Buy 10 of the 3530 puts at $1.30.
This means that the net cash inflow is $450, and even if the market drops 300 points, the options will expire worthless, which means another gain.
By the end of January, SPX bounced back over 200 points, and both options expired worthless, which resulted in a gain of $450.
This cycle is continuously repeated on a monthly basis. Therefore, profits accumulate steadily with time. The strategy has a total of $4,050 in profit after 12 months, which represents 85% return on capital.
Managing Less Bullish Markets
This strategy did quite well in 2023; however, in less favorable markets, this has to be taken into account. As an example, in August 2022, the market sold off and success probability went lower. Delta for sold puts moved up to 20% at that time; this meant it was likely that the trade may fail.
Here, the rollover strategy was about buying the initial puts back and selling a new put, but at a lower strike. In this rollover technique, they risk to be managed down if market conditions are poor; in fact, it did turn out this way in September 2022.
In rolling down the puts, and doubling up the lot, success is maximally increased, so when the market dropped, there was enough in the saving, and hence there was an added profit.
Key Takeaways
- Put Credit Spreads have a high probability of success when using 10 Delta options.
- This strategy can be used in all market conditions, but adjustments do need to be made in volatile markets.
- Using this type of roll could help spread risks and thus potentially increase chances to profit within lesser bullish climates.
- Consistently using such strategies can earn consistent income for an account holder with the progression in time.
- A 10 delta put credit spread is good enough for beginner levels and it’s a method, which month in month can produce a longterm trading success career.