Ok here is the analysis from last week.
I normally trade only the NDX (Nasdaq 100), RUT (Russell 2000), SPX (S&P 500) indices. These are traded through the CBOE (Chicago Board of Options Exchange). If I cannot find any spreads that fit my criteria then I will look at other weeklies. The CBOE maintains a list of available weeklies. Here is the link: Available Weeklys. Our goal is to have the spreads we enter being worthless at expiration so we can keep the full premium.
The first day of the week I start looking at the indices to see if there are any trades that fit my criteria. Here is that criteria:
1. The short option strike price will be at least 1 Standard deviation from the underlying price of the index.
2. The spread size usually is $10.
3. The premium per contract is $0.40 minimum.
4. If the index is rising I will look to the put side, and conversely if the index is falling I will look to the call side for the spread to enter.
5. I will look at all the indices even if I find one spread that meets the above criteria.
After going through these criteria I found the NDX had the best opportunity. The other indices were really not giving anything for premium. So Wednesday morning I put on the following spreads:
NDX 2400 $3.00 Cr
NDX 2410 $1.90 Dr This gives a $1.10 Net Credit
This gives $110 per contract with a contract size of $10. The NDX 2400 is more than 1 Std Deviation from the underlying strike price as NDX started Monday at 2392 and went down from there.
I also put on the following spread (this is a call spread):
NDX 2415 $1.72 Cr
NDX 2425 $1.17 Dr This gives a $0.55 Net Credit
The returns for these spreads are pretty impressive! 11% and 5.5% respectively. A high margin of safety with the underlying price starting at 1 SD (Std Deviation) from the strike price and growing. As the week progressed NDX never got back to the Monday opening price. Just what we like to see.
Friday morning NDX starting running up so I decided to look and see if I could put on a put spread to increase my earnings. Now when doing this I only looked at the NDX for the put side. A couple of reasons for this:
1. I can make the spread margin requirement free up to the amount of current NDX spreads I have on at the moment.
2. I have already put a lot of work on the NDX to enter the call side, I can use this info to see if the put side is a good trade.
Ok, the trend is starting to go up, I look for a trade at least 1 SD away from the 2320 mark. I find one ate the 2280-2295 mark. The spread size is a little larger than what I like to usually do, but at the late hour with time decay working I had to increase the spread size to be able to make any money on the trade. Here is the put spread I found:
NDX 2295 $1.23 Cr
NDX 2280 $0.93 Dr This gave me a Net Credit of $0.30
Now this trade fell below my 4.00% ideal (2.0%), but with the trend in my favor and not having to commit any margin, this trade becomes worthwhile. I am not committing any more resources but still getting return.
Friday ended up with all positions winning. All spreads ended up worthless at expiration. We used our trading rules and stuck with them, and we ended up making good money this week. Starting Monday we will replay this all over again looking for the next good trade.
Any questions leave them as comments below or email to hashleycm@yahoo.com
TTFN
Ash
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