Many traders suffer through lulls in their trading performance that eventually cut short the trader’s enthusiasm and aggravation. Indeed, it can often happen that very good research and well-defined trading ideas do not coincide with profits. This makes an already difficult journey even more unbearable for those who imagine being professional traders but are disillusioned by a lack of self-confidence and poor results from their trades. So then, a lot of them fail and will never know how they would fare in the markets.
Luckily, the world of options trading does have a solution for those who cannot manage to stay consistent. Specifically, the strategy presented here is based on options of QQQ ETF, tracking the performance of the Nasdaq-100 Index. The QQQ ETF includes many leading tech stocks such as Apple, Amazon, and Tesla, which makes it a very attractive product for bullish traders. It focuses on concepts involving options trading, in particular Delta and put credit spreads, and thus forms a high-probability approach with a potential for spectacular win rates.
This article will outline a simple yet effective trading strategy that yields almost a 90% win rate. Using a systematic approach to options trading on the QQQ ETF gives a trader the opportunity to have a higher chance of winning and makes him regain his confidence in the market. We will analyze this strategy below and break it into very manageable steps for you to execute.
Understanding Options Basics
Knowing this, it will be essential to understand the basics of trading options before delving into specifics. Options are financial derivatives that offer to the buyer a right without obligation to buy or sell an underlying asset at a given price up to a stipulated date of expiration. Many contracts of QQQ ETF have made it quite popular with the traders.
An important derivative concept is Delta, which is the measure of how much the price of an option might change given a change in the underlying asset. In this strategy, we focus on puts with a Delta of approximately 10, which means that there is less than a 10 percent chance that the option will expire in the money.
High-Probability Options Strategy
This is a put credit spread. You would be selling a put option while buying another put option at a lower strike price. It is an idea that one would earn premium from the sold option and the purchasing of the option would take care of the losses. Now, let’s take it step by step in executing this strategy:
- Start with the evaluation of the QQQ ETF and assume a bullish position. This strategy is predicated on an assumption that the price of the QQQ either remains above the chosen strike price or continues to rise.
Select Your Options
- Use the QQQ options chain to find the 10 Delta put options which are approximately 10% OTM. Take QQQ ETF trading at $322 and identify a put option strike approximately at $295 to sell and buy a put option with a lower strike, in this case $290.
Trade Execution:
- Sell the 295 put option at the premium of $1.26.
- Buy the 290 put option with a cheaper premium, approximately $0.93.
This will leave you with a net credit of $0.33 per share or $330 for 10 contracts.
Trade Observance:
- Once the trade is in, watch how the QQQ ETF continues to perform. Should the QQQ ETF not fall to either strike price you purchased, both options will expire worthless, and you retain the premium collected when entering into the trade.
Repeat Monthly:
- Assuming your bullish bias continues to hold water, you can play this strategy monthly selling new put options with similar parameters.
Profit Analysis
The beauty of this strategy lies in its high probability of winning. A 10 Delta put option gives you roughly a 90% chance that the options are going to expire worthless. In the example in section, after consistent trading for 12 months, a trader using this strategy could probably generate a total profit of $3,850, reflecting an impressive 81.3% return on the peak capital required for the trades.
The beauty of this strategy lies in its simplicity. In fact, you can take a sell-off in the QQQ ETF and this should still allow you to profit out of the trade so long as it remains above the short put strike price.
Important Notes and Risks
The beauty of this strategy with excellent win rates are important to understand the risks associated with them. Here are a few things to consider:
- Bullish Bias is Critical: This strategy works best when you remain on a bullish side of the QQQ ETF. If the market suddenly turns bearish, be prepared to manage the trade in those directions, too, and likely close it early to avoid more significant losses.
- Market Volatility: In very volatile markets, options can become very unruly. Always, therefore, have a plan in place for handling your trades during unexpected market activity.
- Long-term Outlook: Any strategy that is sure to produce wins will sometimes produce losses, and the results from year-to-year may vary. Take this strategy as a complementing one for other trading strategies rather than an only strategy in trading.
Conclusion
This simple trading strategy could produce a 90% win rate with a systematic approach to the options trading on the QQQ ETF. By understanding the mechanics of a put credit spread and then trading them using a bullish bias will be an excellent way to quickly regain confidence as well as maintain consistent profits.
Professional traders use these high-probability strategies to build upon their trading portfolios, but now you have insight into that as well. You can seize the chance to join workshops and take hints from the best professionals by taking your trading to the next level if you are eager to explore more options strategies. Remember that in the world of trading, one thing is sure: long-term success demands persistence and flexibility.