Breaking Down A Trade In SPY

Okay so via my newsletter I have received a lot of questions about trading options and how to best do it, which of course there is no right or wrong way.  But with that said one of the more interesting questions I receive the most is "I get big gains but then give a lot or all back".  So I am going to delve into a strategy I frequently use and we are going to use a trade in SPY today.  For me right now as I have said I am in all cash mode and just day trading the first few hours but I have also been trading SPY  bit in the afternoon and today if you watched the order level 2 or whatever you use you could fairly clearly see any rally up to 166.30 was finding a lot of sellers.  Whether you just looked at the chart or studied the tape I mainly watch the tape as I am not doing much as else and I have found you can put together some decent scalps.  Now the risk reward in these is never going to be great as it mostly never will be in scalps but one has to rely on probabilities and that probability is simply your ability to read the market and be able to trade solid set-ups that are going to be successful a lot of the time.  So around 1ish we rallied back up to that 166.30 area and I short the market via weekly 166 puts.  Continued below.

I paid 1.07 and I would stop out in the 166.45-166.50 area so risking maybe .03-.04 plus slippage of .02 so .05-.06 risk.  The next thing I do is Que. up my levels via a chart and attempt to predict my puts price once reaching those levels so I can have my offers out there as the market is having these quick spikes and I want to get filled on those.  I paid 1.07 for the puts by the way as it is difficult to tell from there unless of course you use etrade.  So thankfully the trade works out and my first target is reached and I get only a partial fill at 1.17 and then sell out the rest 1.15-1.13 so at this stage I am out half the position. With average profits of .08 and my stop on the balance is roughly break even, so at this stage I am essentially looking for a big stick down to dump another quarter and leave another trailer to be out before Obama.  So I get the spike into Obama and I dump another quarter for .27 profit.  So now we have average profits of .15 on the 3/4 we sold and have a decision to make on the balance do we stay for Obama or do we go.  So at this stage I want to keep a little short exposure but like in boxing I do not want my nose out there wide open so being well ahead here I have a lot of options that I can do.  So  I decided on creating a butterfly a very powerful strategy when your ahead so being long the 166 I decided on creating a 166-164-162 butterfly so selling the ratio put spread to create the fly brought in $1 and my original cost was $1.07.  So my max loss on this last 1/4 is .07 and my upside is $2 so I am getting 28.5 to 1 odds on my money.. You do not have to be the best trader in the world to be profitable with those odds.


So lets back track a bit we have .15 profit average on 3/4, so our worst case scenario on the trade is an avg profit of .10 per contract not bad.  Our best case scenario is average profits of .62 average profit per contract with what at this point is 0 risk from inception of the trade.  Of course mark to market my risk here over night is .38 but that is okay as I have spoken about in the past I view options trade aside from day trades as creating a piece of art work and in the end using this strategy you either end up with an inexpensive coaster or you end up with a Picasso... These are the types of odds you want on your side to grab profits out of the tape using options in my opinion.  There are tons of options I have now until Friday with this trade as well we shall see how it plays out and what I do with it...

P.S. hopefully I made some sense out of one of the strategies I use when looking to keep my nose clean and break some jaws once in a while.


Be Well,

Keith