I’ve used options trading strategies that have given me a win rate of over 80%,
since the beginning of the year, of this bear market.
In this post, I’ll introduce you to these strategies by explaining the basics.
I’ll walk you through an actual example for each of them and at the end, for each strategy, we’ll show the pros and cons.
If you like to read more about options trading (Greeks) check those other posts I wrote
Delta Options Greeks and Selling put options for Income.
Table of contacts
- Options trading strategies
- How to make sure you get a credit spread
- Leap – options trading strategies
- The wheel – options trading strategies
- Example options trading strategies
Options trading strategies
Credit Spreads
The first and most popular strategy I used this year was credit spreads, more specifically low delta credit spreads.
Credit spreads work by first buying and selling options of the same type with the same expiration date.
There are two types of credit spreads:
Call-credit-spread
Is bullish if you believe the stock will be below your strike price on the expiration date.
Put-credit-spread
Is bullish if you believe that the stock will be above the strike price on the expiration date.
When we open these options, we buy and sell options of the same type.
Make sure that the option we sell is more expensive,
getting a net credit from the trade instead of paying a debit.
Paying equals debit, which is the opposite of what you assume.
How to make sure you get a credit spread
Call credit spread, you want to sell a call option with a lower strike price than the option you’re buying.
Put credit spread, you want to sell an option with a higher strike price than the option you’re buying.
How much credit can we get?
the credit you get when you open this trade depends on the strike prices you choose.
It also depends on your expiration date, the longer you set the expiration date.
The longer you set the expiration date, the more credit you’ll get.
The strike price will also depend on how far in the money and how close to the money the option is, which is based on the strike price in relation to.
to where the stock price is.
So the credit, the strike price, and the expiry date work together. Let me walk you through a recent example Let’s imagine I’m bearish at SPY ETF for next week.
By looking at the option chain table. Expiration Date = November 30, I selected the Calls column because I’m bearish on the stock.
Let’s open a call credit spread and for that, I choose my strike prices by looking at the delta values.
Whenever I open credit spreads, I want to make sure the options expire out of the money and are worthless.
Delta values represent the probability that the option will expire in the money.
We want the opposite of that, so let’s look at this 405-call strike. that’s a delta of 29. That means about a 29 chance that this trade will go against us.
I usually keep them between 20 and 30. the assumption, the spy will be below 405 by my expiry date.
but I don’t have 100 spy shares to sell instead of posting as collateral.
I can use a long call option by buying another call with a higher strike. The higher the strike price I go, the cheaper the option becomes.
Risk management
The collateral for this trade is equal to the difference between the strike prices, multiply that by 100 and that’s
The amount of collateral we need to open this trade, so we need $500 collateral.
We get 1.45 credit and this will define our maximum risk for this trade.
If we subtract those 1.45 credits from the 500 collateral, our maximum loss for opening this trade is 355.
So, the maximum loss for this trade will be much larger than the maximum profit, which will be just the credit we get.
But again, we want the odds to be in our favor so we can generate consistent income from this strategy
As soon as I open this trade and if the trade goes against me the spy is above 405 on my expiry date.
then I will lose my max loss of 355 but if it meets my expectations or the spy stays below my strike price of 405 then come on me with my max win of 1.45 of them.
Now let’s talk about the pros and cons of using the strategy.
The Pros
When it comes to credit spreads is that as long as you keep a low delta, they’re fairly constant.
The lower your delta, the more likely it’s that the option is to expire out of the money and worthless.
You get full credit received when you open the trade and the possibility of the stock going against you.
Another benefit of this strategy is that it’s great for small accounts.
You don’t need a lot of money to get started with credit spreads. You only need the difference between the strike prices.
If you’re a $1 difference in strike prices, you only need $100 in collateral. If you’re starting out with just a thousand dollars to trade options, this can be a really great strategy for you.
The problem with this is, if you don’t have enough to buy or sell 100 shares of your stock, you’ve to close your credit spread before it expires.
if you think the stock could end up between your strike prices on your expiration date.
Known as pin risk is when your options expire in the money at 4 am.
your broker starts exercising and allocating them to you. but then one of the options goes out of the money and in that case you either exercise or have to buy or sell 100 shares of your stock.
If you don’t have enough to cover that, your account will go into deficit and this can add up to a lot of money depending on what you’re trading.
The Cons
You can incur bigger losses, if you open these spreads you can wipe out any profits you made on just a single trade.
That’s why it’s important to know whenever you’re wrong on a trade and be able to get out of it quickly.
if you have a small account and want to use credit spreads, be sure to close your options before they expire if you think the stock will be between your strike prices on your expiration date.
our next strategy, which will be high delta leaps options.
leap stands for long-term stock outlook security.
you can guess from the name that these options will have a longer expiration date.
Specifically, these have over a year until their expiration.
Leap – options trading strategies
The leaps option can be either a call option or a put option depending on whether you’re bullish or bearish on the stock.
it works just like a weekly or monthly option, which you’re probably used to. Only the expiry date will be one year.
being bullish for a year rather than a few weeks for an extended period of time.
The longer you set your expiration date, the more you pay to open your option.
Giving the stock more time means this option comes with more volatility.
paying extra for that extra volatility, you’re paying more for your option the deeper you get into the money.
so this is how the strike price, expiration date, and premium work.
Leap example
if I’m pessimistic about Spy for the next year, I’ll buy put options because I’m pessimistic about the stock.
Then I set my expiration date to one year out, which would take us to September 30, 2023.
when I choose my strike price, I want to make sure the odds are in my favor and that option expires in the money.
we can determine the probability of our option expiring in the money using our delta values.
with a leaps option, I usually keep this value between 70 and 90. I choose to take 460 put, it’s a delta of 93.
so I will buy this put option, and right now it costs 72.97 (that’s my maximum risk)
This trade goes against me, which means I can lose $7297 if Spy is above 460 by the expiration date of September 30, 2023.
The trade plays out as I expect where maybe spy falls from 390 right now to something like 360 in which case this option would have 1000 as the intrinsic value which is the difference between my put strike price and my target price of $360.
I paid $7297 to open this. That’s a return of about 25%. That’s how the leaps work.
let’s talk about the benefits and risks of using the strategy.
The advantage of leaps options
you have a lot of time for the stock to move in the direction you’ve chosen.
but the problem is that you pay more for the extra time value and that means you’ve more to lose if you’re completely wrong.
If a stock just continuously goes against you and expired out of the money, you lose everything.
however, if the stock moves in your favor over an extended period of time, you’ve more to gain.
One of the things about leaps options is that the risk is pretty simple to understand, you can only lose what you put into the trade.
there is no risk of early assignment or anything associated with the sale of an option, these are the advantages and the disadvantages if it is a leaps option.
The wheel – options trading strategies
our last strategy, which will be the wheel strategy.
The wheel strategy consists of two parts:
It starts with selling a put option, and when you sell a put option, you commit to buying one hundred shares at the strike price you choose.
once you own these 100 shares at your chosen strike price, you can use these 100 shares to sell calls against it – this is the second half of the wheel strategy.
When you sell a call option, you sell 100 shares at the strike price you choose, and when it comes to strike prices, expiration dates, and the credit you receive.
the longer you set the expiration date, the more credit you’ll receive for selling your option, as the stock may have higher volatility in a longer time frame
you’ll be paid accordingly for taking this risk, and the further in the money your option is, the more you’ll receive, as this option has an intrinsic value.
you don’t want to sell options that are in the money. Typically, you want to sell options that are out of the money to reduce your chances of getting the order to either buy or sell 100 shares of your stock.
Example options trading strategies
for example, if I want to buy a hundred shares of Spy Wide, they’re currently trading for $387. So if I just wanted to buy the shares on a regular basis, I’d spend $3870 to open 100 shares.
I wouldn’t get any money for it, which is the advantage of selling put options.
so we’re going to sell a put option to buy 100 shares of Spy, and we’re going to extend our expiration date because we’re not going to get much credit.
Let’s take November 16 as the expiration date for maybe two weeks.
Second, I’ll choose a strike price that’s lower than the current market value, so I agree to buy one hundred shares of Spy at a small discount.
I sell the 380 put and agree to buy one hundred Spy shares for 380.
I will need the cash to make this trade, which means I will need $3800 in cash to make this trade.
when I open the trade I will receive a credit of $524 for taking the risk.
As I receive this credit, this will lower my break-even price.
The break-even price would be 387 minus 5.24, which would give a break-even of $381.
This means that if Spy is below 381, I’ll make a loss if I decide to sell my shares.
but I can wait until Spy goes back above 381, and then I’ll make a profit.
if the SPY is above 387, our strike price is our expiration date, then we can keep the money we put into this trade to the tune of $524
we keep that $524 as a credit and then we can sell another put option for another expiration date in two weeks.
Part 2 of the wheel strategy
Finally, we’re filled to buy one hundred shares of Spy, and once we own 100 shares of Spy, we can start selling call options.
so when you sell a call option, you should choose a higher strike price than the current market value.
Again, as with credit spreads, I like to look at delta values, the probability that the option will expire in or out of the money.
Let’s say the 400-strike call has a delta of 32. I’m going to sell this call option, and if I sell this 400 call, I’m committing to sell my 100 spy shares at 400.
if Spy is below 400, I keep my shares and the credit I got from the sale.
that’s $490 in this case to open this trade and the credit I receive.
As we explained, this will increase my break-even price to the strike price of 405.
that’s the wheel strategy for you.
You start by selling a put option and once you own 100 shares, you can start selling call options against those 100 shares you own.
let’s talk about the advantages and disadvantages.
The advantages of the wheel
The wheel strategy is that you can decide for yourself at what price you want to buy and sell your shares when you set the strike price.
so you can sell a put option at a lower strike price than the current market value of the stock, which means you agree to buy the stock at a discount.
But the problem is if the stock keeps going down past your strike price you have to buy those 100 shares, and if the stock continues to go down, you’ll lose money on those 100 shares.
the same is true for a cover call, if you own the 100 shares and want to sell call options and the stock continues to fall, you’ll lose money owning the shares.
But if you sell the call option, you can agree to sell the stock at a higher price than the current market value.
This way you get a slightly better deal, but in order for you to sell your 100 shares,
the stock must be above the strike price on the expiration date.
This means that you might’ve been able to sell the stock at a higher price,
whereas with put options you might’ve been able to buy the stock at a lower price if you’d waited with the wheel strategy,
you can earn a pretty decent income
This is a really great strategy if you’re looking for extra income, but credit spreads can also work the same way.
But you won’t have the same equity since you’re not buying 100 shares, and that’s all the strategies offered
Done!
Hopefully, you found this post useful.
for more reading check “What influences implied volatility for options?” or “What is the meaning of out of the money?“