Hello everyone and welcome back! If you don’t know, now you know, Jesus lives and is working all things for your good! Trust that wherever this message finds you, all will be well very soon. I know it and have experienced it so many times. One day it seems like my world is falling apart then without warning or even my understanding, everything just fits right into place. Truly, miracles are happening all around and I’m praying today we all get to see God at work in our lives.
Full disclosure – I haven’t attempted this easy options strategy before but it does seem interesting. I’ll let you be the judge. Additionally, I didn’t create the easy options strategy but I did tweak it to my liking just slightly. Here is a link to the original strategy by David Freitag on Youtube.
The actual options strategy being utilized here is one of the four variations of vertical spreads. Likely the very first options strategy you ever learned. I know it was for me. Here are some links to each of the strategies for those not yet familiar.
- Bull Put Vertical Spread
- Bear Put Vertical Spread
- Bull Call Vertical Spread
- Bear Call Vertical Spread
Post Agenda
Strategy Overview
This easy options strategy really couldn’t be any simpler if we tried. We’re essentially just entering vertical spreads to capitalize on trending markets. However, the way in which we’ll enter the trades really is quite genius. We’ll be limiting our entries when price is trending the wrong direction and increasing our entries as price moves favorably. Backtesting results are decent but time and live trading will be the definitive test.
Step 1 – Entry
Before I elaborate further, you should know this easy options strategy can be employed in either a bullish or bearish market. However, for the sake of simplicity as I introduce the strategy we’ll focus only on bullish setups. In the next section I’ll discuss a possible variation to play both the bullish and bearish trends.
To begin, enter a bull call spread or a bull put spread on a day when the market is higher than the previous day. For example, suppose $SPY closed at $400 on Friday but upon logging in to my trading platform on Monday I see $SPY trading at $401. In that example, price is increasing and regardless of what happens throughout Monday’s session, I’ll enter a bullish vertical spread as close to the money as possible with 7 days to expiration. Using either of the two bullish vertical options strategies.
The second criteria before entry is to always keep risk/reward at 1:1. For example, on a $1 wide spread I’ll want to collect $50 or pay no more than $50. Theoretically, we could use any strike width we want but that isn’t the way I was introduced to this system. Furthermore, by keeping strike width at $1 per spread, a relatively small account could take full advantage of the opportunity. To often, new traders are barred from participating due to high capital requirements. An account with as little as $1000 dollars would be able to conduct the entire strategy without any modification.
Step 2 – Add On Positions
Once the initial vertical is in place, we will monitor the market and enter additional vertical spreads each day the market moves higher. Should the market move lower a trade would not be placed. Each additional vertical would adhere to the original trade criteria. The add-on trade must be entered close to or at the money and the trade duration will remain at 7 days to expiration. Using $SPY makes the most sense because it’s highly liquid and offers almost daily expiration cycles. However, should it be needed the trade could be extended to 8, 9, 10, etc. days. Per the original strategy guidelines, preference is to extend duration rather than move under 7 days to expiry.
Step 3 – Exit
Each trade that is entered is held until either a max profit or a max loss has resulted. In theory, if the market is trending higher we’ll be increasing our position size in step with the market. Should the market turn lower our loss would be limited because we wouldn’t be increasing our position size.
Overview Checklist
- Enter Bullish Vertical Spread with 1:1 risk/reward and 7 DTE
- Enter Bullish Vertical Spread each day the market moves higher
- Close or let positions expire for max loss or max profit
Strategy Variation
The only variation to the easy options strategy I want to mention would be to play on both sides of the market. When the market moves higher, enter a bullish trade. When the market moves lower, enter a bearish trade. The strategy mechanics would ultimately create more positions on the side of the market that was trending. If the market was moving higher, it would be unavoidable to have more bullish verticals. Should the market be moving lower, the same would be true for bearish trades.
I’m sure there are hundreds of ways this could be altered further and I encourage everyone to find what works best for them. However, by playing both sides at the same time we would be active in the market virtually every day. Similar in nature to the house edge at a casino, we would just be creating as many opportunities as possible. For example, the house edge in blackjack, I believe is 53%, by playing thousands of hands the casino is further benefiting from that slight advantage. They may lose 47% of the hands being played, but over time they always come out ahead. The same would be true here. By playing the easy options strategy both bullishly and bearishly at the same time we’re creating many more opportunities to exploit our edge.
That edge in this case, would be the increasingly larger position size as the market moves in one direction or another. The only downside, if we want to call it that, would be the account size requirement. In the original strategy the absolute most trades we could have on at any given time would be 6 which means that our account size must slightly larger to match the same possibility on the other side of the market.
Lastly, I’m not sure I would just go head first into playing both directions of the market. For me, I’m probably going to test the waters with as little as possible to see how I perform over at least a month but probably 3 months or more before starting to “double dip”.
Back Test Results
- Test #1 – January 3, 2022 – February 7, 2022
- Bearish Market
- Bullish Only Trades
| Total # of Trades | Profit / Loss |
|---|---|
| 10 | ($205) |
As expected, the easy options strategy performed poorly but not excessively so, in my opinion. Sure, the possibility is there to further fit entry criteria to avoid those one day retracement moves but that gets into the weeds with no guarantee of improvement. In the next test, we’ll look at a bullish market with bullish trades for comparison.
- Test #2 – January 3, 2023 – February 8, 2023
- Bullish Market
- Bullish Only Trades
| Total # of Trades | Profit / Loss |
|---|---|
| 11 | $241 |
In this test, surprisingly only 1 additional trade was entered but the p/l was higher during the bullish market phase. I think highlighting the entire premise of this particular strategy. By creating as many potential trading opportunities, we’re able to take advantage of the built in edge we’ve created. Of course, these metrics don’t account for commission costs which could effectively kneecap any potential.
Final Thoughts
A few things I like with regard to this strategy is it’s simplicity, the lack of technical or fundamental analysis, and it’s ability to create a positive edge. However, as we can see the market is really quite good at retracing against a trend just enough to minimize gains and maximize losses. Therefore, if this strategy were to be considered it may be prudent to develop some additional entry criteria.
That said, the positive expected outcome coupled with a large enough sample of occurrences should yield a small but consistent profit. I only back-tested the easy options strategy for one month and the result were mostly as expected. Admittedly, I would have like to seen the loses further minimized but as the market bounced around, I entered positions according to the plan. I would have also liked to have seen at least one more trade during the bullish market. In total, the strategy falls through entirely if more bullish trades are not employed during a bullish phase. In this instance, I was able to come out just slightly ahead but in reality I was flat if commissions were included.
When I first started writing this post, I thought the strategy looked very promising but at this point it seems clear more testing is certainly in order before implementation. Largely, the problems inherent to all options strategies are still present here and that would need to be addressed before going forward with any size.
Until the next post.
God bless,
Jeff
