Day trading options can be tough, there are not only multiple different variables in the greeks in options trading but there are also thousands of stocks to choose from. Means you can easily miss some moves and get tangled. OR, you can focus on one market that is a composition of some of the largest 500 stocks in the economy. The SPY or the ETF of the S&P500. This happens to be the most liquid market to trade in options as well.
Throughout this reading you will learn:
- What is the SPY
- The PROs & CONs of trading the SPY
- SPY Options basics
- SPY Options technical analysis
- SPY Options trading strategy
1. What is the SPY?
The SPY ETF is an ETF based on the S&P 500 tracking the index, it’s also the oldest US-listed ETF, one of the most traded, and with the greatest trading volume. The SPY also has nearly $370B AUM. The committee chooses 500 securities to track that represents the US large-caps. With the large trading volume, day traders, investors, and hedges rejoice in the use of the SPY on a daily basis.
Here is the performance of the SPY over the last 5-years (weekly basis)
2. The PROs & CONs of trading the SPY:
- The SPY is the most liquid ETF on the market
- The SPY options are the most liquid options on the market
- The SPY is a singular trading vehicle, instead of scanning 100-200 stocks to find movers, the SPY usually has some really good moves daily.
- The SPY options have 3 expiration a week, meaning you have more choice and liquidity.
- The SPY options on a shorter term basis are cheap (can find options under $1.00 or $100)
- The SPY is just one instrument, there might be other stocks that have better moves throughout the day.
- The SPY doesn’t always have amazing moves throughout the day, remember it is an index so it’s stable. Beta of 1.0. There will always be a move, but there might only be 1 or 2 a day.
3. SPY options Basics:
SPY options are the most liquid options a trader can trade, they have high open interest and they also have high volume. The best part of SPY options is that you have 3 different options expiries each week to choose from. Monday, Wednesday, and Friday are all of the expiries. Meaning as a day trader you don’t have to trade the zero day to expiry (0dte) ever. You can opt into trading the next expiry or the Friday expiry up to Friday, then trade the Monday on that day. The premise is that day traders will use the short-term expiries to trade options more so than multiple weeks out.
Short-term options on the SPY are extremely liquid, they are really cheap and have the potential to move a lot. Options day traders shouldn’t go farther than 7 days out in terms of expiration, at that point you are paying a lot for the options time value which you will not be using. If you don’t use more than a day of time value there is no use to buy that much time, traders should not turn day trades into swing trades unless you are prepared to buy more time or roll the options.
If I am day trading SPY options on Monday, I will look at the Wednesday or Friday options. If trading SPY options on Wednesday, looking to trade Friday options. If trading Friday, looking to trade the following Monday expirations.
There are ways to mitigate the short time effects in the options world, that is by understanding the Greeks and using them to your advantage.
Short-term options are more volatile, meaning you have to have the right process to select options when day trading the SPY.
The greeks you should understand are:
- Delta: This is the change in the options premium based on a $1 change in the underlying. Usually denoted as a percentage of the $1 change in the underlying. For example, if you choose an option with a 0.5 delta, it will account for a 50% move relative to the $1 change in the underlying. If the underlying goes up $1 then the options will go up $50 per contract.
- Trading SPY options you want to look out for a delta of approximately 0.25 to 0.30.
- If you are trading 0dte or 2dte, you should be looking for greater than 30% delta.
- Remember that puts are the same, just the sign changes. So puts are going to have a negative delta.
- Theta: This greek is closely tied to the time decay factor of options. The main thing that traders need to know when trading options is that the shorter the expiry you choose, the quicker theta will decay. The less an option moves, the more theta will affect the position as well. Meaning on 0dte theta will crush the position so traders need to choose a higher delta to combat the moves.
- Vega: The Vega reading is the change of the options premium based on a 1% change in the implied volatility. Meaning that implied volatility is at the epicenter of this reading. In day trading, we want to make sure that the IV of the SPY is at a normal area otherwise a drop when trading is going to result in a loss even if the price is going your way. SPY IV is usually around 15-20% short term, anything above in the 30% area and more is trouble. The pricing of the options is going to be inflated.
Based on the options ladder below we can use the information above to choose our ideal put options or call options on the SPY.
First, we look at the expiration, we can trade 0dte, 2dte, 5dte. So why don’t we stick to 2dte for the short term. You can then see the IV measure at the top right. The 37.8% IV means that the current SPY IV is higher than the usual reading. Making the options more expensive.
Looking at this chain for calls:
- Delta 0.25- 0.3 or so is represented by 407 down to 405 calls.
- Notice the volume and OI, which strikes have the most volume? 405 looks the best because of the “round number”, 406 is a little cheaper with a tight spread and heavy volume.
- We could select either 405 or 406 calls in this case.
If you want to learn more about options selection take a look at this article: HERE.
4. SPY Options Technical Analysis
Day trading technical analysis for the SPY is pretty simple, we never want to overcomplicate things with multiple indicators or too much noise on our screens.
Overall what we need is:
- Multiple time frame analysis (daily, hourly, 10-min, and 5-min charts)
- Volume profiles
- 20-day Exponential moving average (used on 5-min chart)
- Volume histogram.
First starting on the daily chart to get major levels and using the volume profile ledges to really construct a better image of what is to be expected in the market throughout the session. More on volume profiles here.
Then drop down to the hourly chart. Where you can refine the levels and add other levels of importance to your chart.
When you continue to do this down to the 5-min, the 5-min chart will be the main chart that you trade-off. Where you are going to look for either extremes (massive supports and resistances) or a trend to trade.
Below is the SPY 5-min with our adjusted levels, you can see over the last few days we’ve been sitting range bound. Meaning trading the extremes is the most advantageous. Especially around the 403 resistance for a sell. You can also look for the trend continuation if you follow the 20-day EMA on the 5-min which is the blue moving average line in the image.
In the final piece of the puzzle, we want to make sure that the volume is in our direction. The thicker the volume in the horizontal histogram at the bottom of the chart the better for that direction. You would want to compare the volume to the prior candles and the moving average to know if it’s actually a strong volume. If you want to learn more about this, check out the following page!
5. SPY Options Trading Strategy
The options trading strategy used to day trade SPY options is fairly simple, we look for market extremes and ledges in the volume profiles to see if there can be a shift in balance.
Meaning we follow the rules above and look for the technical analysis as laid out as well as the options selection.
Let’s go through an example of how it works out. Using the same example as stated above. We can identify the 403 as a key resistance from the prior day where we see the volume profile ledge drop off. Meaning that price wants to hold in balance and sustain under 403 and into the 396 area. What SPY day traders need to wait for is the move to the upside to stall out in terms of volume as well as a few rotations at the tops. Seeing a 5-min red candle close on heavier volume is a really good indication to start the extreme move to the downside. The more we rotate with the heavier volume on the moves lower the better the opportunity for that sell.
In this case, we did this live in our trading room. We looked for the sell side at the tops of that resistance at 403 and took a quick piece on three different options strikes.
These were done with 0dte so they were riskier and we were looking for quicker moves off the resistance to take advantage of the extreme move.
Day trading SPY options is a very good opportunity in the market for traders that don’t have the time to look at multiple different tickers throughout the day or to analyze them. The SPY is a combination of 500 large-cap companies in the US and has daily moves that can be extremely opportunistic with the right strategy. Check out TRADEPRO Academy for a SPY and QQQ strategy in the options market, that we trade each day in the morning room session LIVE.
If you want to join with us in our live trading room, Check This Out.
The information contained in this post is solely for educational purposes and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable for your own financial situation. TRADEPRO AcademyTM is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.