One problem which most of the retail options traders go through is that, though they can experience some success or at least supposed-to-be success in option trading, most of them are often stuck with feelings that their growth is considerably slow as compared to what they actually wanted.
Mostly, they fail to identify what exactly sets them back and how exactly they can accelerate their returns more effectively. This problem is usually evident during the strong bullish market conditions: they miss the opportunity to maximize their gains.
What is The SMB Capital Approach?
Professional options traders at SMB Capital, one of the world’s leading proprietary trading firms in New York City, face this daily. Seth Freyberg gives a flavor of some strategies and techniques employed with good results by successful traders to enhance returns.
With more than a decade of professional experience and a very successful track record, it is the approach at SMB Capital to employ proven strategies in order to optimize the use of capital, which will improve trading outcomes.
Put Credit Spread Strategy and Aggressive Profit-Taking
One of the better strategies discussed is one implemented by the pros at SMB Capital: the put credit spread strategy, coupled with more aggressive profitability stopping. This means entry into a trade must be made with clear indication of market states and that the trade will need early exit to realize profits with efficiency.
Put Credit Spread Strategy Understanding
The put credit spread strategy works particularly well in a bullish market, such as the one observed in the first half of 2024. This strategy involves selling a put option at a higher strike price and buying another put option at a lower strike price—a truly bullish trade.
An example could be that on December 18, 2023, the start of a put credit spread with options expiry on February 16, 2024, one would sell a put option with a 20 Delta at a strike price of 4575 and buy another put option 100 points lower at 4475. This trade shall be done in anticipation of the market’s bullish trend to earn from it—keeping the index above the point where the sold put option was struck.
Calculating Cash Flow and Possible Return
This is the resultant cash flow from the trade: selling the 4575 put option for $3,385 and buying the 4475 put option for $2,240. The net cash inflow is $1,145.
If the market is still bullish, and at expiration the index closes above 4575, then both options expire worthless and this initial cash inflow becomes your profit.
The Impact of Early Profit-Taking
Instead of letting the trade expire, a more aggressive approach would be closing the trade when it reaches a profit level of 50% of the initial cash flow. Using the same example above, if 24 days into the trade the trade reaches this profit level, a trader can close the position and redeploy the capital into a new trade.
By closing the trade this way, you seize the profit available much quicker and can do more than one trade in a year. Using the same example above, closing the trade early on January 11, 2024, at a profit of $590, you immediately can start another trade and increase your potential highest returns.
Building a Better Trading Strategy
The result of this approach is more trades with higher overall profits. In the first half of 2024, the aggressive profit-taking strategy yielded 10 trades versus only three using a more traditional approach. It is this kind of efficiency that can result in substantial gains by partially taking profits early and redeploying one’s capital.
Profits through a Professional Trading Mindset
Professional options traders realize that the secret to maximizing return is in capital utilization rather than sitting around and holding onto slow trades that are costing them an opportunity cost. In so doing, partial profits early and redeployment of capital continually offer traders substantial returns and improvement in trading performance.
Conclusion
The keys to higher returns with options trading are to utilize spreads such as the put credit spread, but more importantly, to think like a professional when it comes to taking profits. A focus on maximizing capital efficiency and taking early profits can greatly improve your trading results. SMB Capital illustrates valuable inside information on how to manage options trades for better and quicker income returns.
To go even deeper in learning and explore more advanced options strategies, you will have access to a free workshop that covers advanced techniques and strategies. This way, you will be able to dive deeper in understanding and refine your trade towards even greater success.
