Weekly Options Trade on S&P500
Hello TRADEPROs,
We will be using weekly options to setup a vertical credit spread utilizing call options. Writing one out-of-the-money weekly option will generate premium for us, while purchasing a further out-of-the-money weekly option will cap our upside risk should the equity market surge proving our analysis wrong.
Our technical analysis has identified that the equity market has very little chance of exceeding the 2,110 resistance level for this week, and a credit spread is a perfect weekly options strategy to take advantage of this hypothesis. So let’s setup this trade!
Trade Setup
The bear call weekly options trade setup comprises of two separate positions, entered as one:
- Short April 24th, 2,110 call option – collect $215 cash per contract
- Long April 24th , 2120 call option – pay $90 cash per contract
Total credit is $125, deposited as cash directly into your account once this trade is triggered. If the price of the S&P500 remains below 2,110 we keep this cash. But before we talk about profits, we need to think like TRADEPROs and define our risk!
Risk Analysis
Our maximum risk occurs when the S&P500 index closes above 2,120 by the end of this week, which would generate an $875 loss ( (2,110 strike – 2,120 strike) + $125 premium collected).
So why would a trader risk $875 loss to make a $125 return using weekly options? The answer lies in probability.
The delta value indicates the probability that this trade is profitable as an options buyer, which stands at 8.48%. As the seller of the option, our probability is 100 minus the buyer’s probability, which is 100% – 8.48%, or 91.52%!
From here, the expected returns math is simple:
$850 loss x 8.48% probability = $72.08 expected loss
$125 return x 91.52% probability = $114.40 expected return
As you can see, this is a trade that actually generates a 2:1 return to risk when you factor in the probability using the delta values! This is a trade I would do 10 out of 10 times.
Conclusion
Money management should always be taken into account to help you decide the trade position sizing, but the bare minimum is listed above. Considering we have a $175,000 account balance, we can risk a maximum of 2% on this trade. This means our max risk is $3,500. Therefore our trade size is 4 contracts, calculated by dividing our single trade risk capital of $3500, by our trade setup maximum loss total of $850.
This means we multiply the $125 weekly income by 4, and generate a $500 pay check if we are right. This is $2,000 a month, or 13.7% a year return!
This is how the real TRADEPROs trade! If you would like to learn how to conduct technical analysis with laser precision, or how to utilize options to win in every market condition, subscribe for the package that is right for you today and start learning and earning!
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The information contained in this presentation 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 to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.
