A Simple Strategy For Day Trading Short Strangles On Stocks

When one buys an option in the stock market there are only three things that can happen and two of them are bad for the buyer. It goes your way right away which is good. It goes against you, which is bad. Or it goes sideways and time decay eats away the premium paid, which is bad.

It’s the same selling an option but much better because the time decay is on the seller’s side. If the stock goes sideways, the seller keeps the premium on the option. In other words, if one buys an option, one has a 66% chance of losing money; if one sells the option, it’s a 66% chance of making money.

So, obviously, it’s best to be on the sell side…

Simple as that?

Not so fast, if one does this without owning the stock, it’s called being “naked”, being naked a call, naked a put. Being nakedly short both the call and the put is a naked short strangle.

The trouble is the margin requirement on those are often times so high one might as well be trading the stock, and requirement often varies from brokerage to brokerage. So let’s say one might have to put up as much as $20,000 on a day trade with the prospect of making a couple of hundred bucks. A lot of risk, it would seem, for not much return. And it’s a day trade so there’s not all that much time to have the stock go your way or sideways.

But day trading is the key to this strategy.

First off, short strangles on volatile stocks can be extremely risky. If the price of the stock gets over the call strike or below the put strike, and runs, the loss can be virtually astronomical.

Day trading eliminates the overnight risk, and that is saying a lot. News after the market close, or just plain irrational exuberance in a volatile stock, can absolutely slaughter a short trader in strangles.

In addition, risk can be further controlled during the day, when the trade can be monitored, by using a tight stop-loss to guard against big price movements.

Secondly, with this day trading strategy the same expensive cash margin is being used over and over again anew each day and it usually is a lower requirement day by day as the strangle moves to the Friday expiration each week. But let’s say it’s an average $20,000 margin requirement…for simplicity’s sake.

This is a strategy that can be used on the weekly options for a any prominent stock — TSLA, AAPL, NFLX SHOP, NFLX BA, NVDA — with decent options liquidity and worthwhile price swings. And it’s a strategy that can be used week in and week out without ever having to buy the stock itself.

So what’s the result?

Today a TSLA a short 575/555 strangle gained $600 per strangle for the day trade. Let’s say one averages $600 per day through the week, and keep in mind both side the trade can expire worthless on Friday’s giving a big win (Friday’s are the best day obviously), yielding a weekly return of $3000.

A steady gain of 15% for the week, based on the $20,000 margin requirement without ever owning the stock. Multiply that by 52 weeks on same margin and…aw, you do the math.

This is just an example of how a trade can go. Other day trades (obviously) can be greater or less.

On the chart below the green dots are the price of the strangle, the green horizontal line at 21.66 is the price of the entry, the red horizontal line at 23.66 is the stop-loss, a $200 risk per strangle shorted. The white flag on the right axis is the profit for the the day trade. It is a negative number because it is a short.

(Click on the chart for a larger view)

#MarketTiming the #ShortList – Stocks UPDATED

The obvious stock sectors that are no-brainers for shorting largely because Covid-19 has put them either out of business for the immediate future or has severely hampered profit prospects for this year.

The most obvious are the cruise companies – NCLH, CCL, RCL – since it’s going to be a long time before they can pack a liner with either customers and crews. And now several of the key destinations have so enjoyed being tourist free there is talk they are not even going to allow the ships to dock and disgorge passengers like they were doing before the pandemic.

Next on the list movie theaters – AMC, CNK – since even if they open with social distancing they will at reduced audience capacity. Can they make profits on half a house or less?

It’s the same in the airline sector – AAL, UAL, DAL, LUV – less flights, less passengers, more trouble with the virus every hour of the day. Throw with BA too. No need to buy passenger planes when there are so few passengers and you have a fleet of excess airliners in storage.

Banks are on the short list too — JPM, GS, BAC, C, WFC – largely because they have lagged the rally from the March low for too long. That spells trouble not only for the sector but for the market as a whole. If the economy is going to tank and take the stock market with it (any day, week, or month now), it’ll probably, seriously, start the drop in the banks.

UPDATE: Am adding YELP and TRIP to the list. Without as much to review as they had before the pandemic, they have diminished prospects for the near term and maybe longer.

Coal stocks – BTU, ARCH, SXC, CNX – on the short list because the coal sector is always a short. It is not the fuel of the future and is becoming more and more not the fuel of the present. If ever there is a sector for swing traders to short every bounce this is it.

#OptionsStrategy – #DayTrading $TSLA strangles

“No one can day trade stock options!” an irate administrator of a Facebook options trading group told me back at the beginning of the year.

His group was centered on “investment income using options.” He was basically doing covered calls or puts, rolling them forward when necessary, in an effort of adding ten or so percent to ownership of the stocks themselves. Fine.

I just happened to blunder into the group day trading SPY calls and puts for ten times that return. I don’t know if it was the returns or, as he said, his belief the practice was so risky I should not be suggesting it anyone.

I argued there were ways to control risk and he might want to open his mind.

He didn’t want to evidently since he blocked from the room.

Well, at the time I got tossed, I thought maybe he might right – after all, trading SPY options was not the same as stock options. As the most popular ETF its option were extremely liquid, with tight spreads, and three expiry days per week. I’ve chronicled much of the SPY trading in posts below so I won’t get into it anymore in this one.

Stock options didn’t have those qualities but some came close – AAPL and FB particularly, others like NFLX, NVDA. The trouble with each of the stock-option trades, however, was that not only did one have to get the direction right for the day (it is a call or a put?) but one also had to have enough movement to make it worthwhile, and then each trade needed to be monitored pretty much constantly all day.

What I was after was a strategy that could be put on early and ignored to the end of the day unless it hit a stop loss during the day, at which time there might have to be a reentry if there was still time to reap some reward.

The trouble with even the best stocks like AAPL, FB, etc. was there was usually not enough bang for the buck in a single day.

Then along came TSLA.

It didn’t take to discover TSLA weekly options were as good as it gets for day trading short strangles, lots of premium, a big range of movement and enough liquidity to fairly easy to put on the trade and, most importantly, to get out of the trade.

In a short strangle, one is playing time decay (theta) every day on the strikes both above and below the stock’s price at the start of the trade.

And one has to keep in mind that shorting options naked (without owning the stock) requires considerable margin buying power – one ends up needing to put up $30K to $50K to maybe make $500 on some days. That might not seem worth it, but the ringer in a day trade is it’s the same margin every day and stays the same as the daily profits pile up all week long. Oftentimes, the day by day ends up making double-digit on the margin requirement for the week (see the green cells in the table below).

Using a tight stop (like $200 per contract) and selecting the right spread of strikes prices, significant returns can be had in a month.

For August, the TSLA short strangles yielded $18,800 per contract on a maximum margin requirement of $50,521 per contract (as prescribed by the CBOE MARGIN CALCULATOR, a 37.4% return for the month (see the yellow cells in the table below).

That’s without having to know what TSLA was going to do on any given day in any volatile month of wild price swings.

(click on the table for a larger view)

#DayTrading $SPY #Options – after seven days up, SPY gets put

As SPY tried to gap into an 8th day up in a row, it was obvious any fall back through the open was trigger to buy the puts.

FIRST TRADE:

SECOND TRADE ENTRY:

SECOND TRADE CLOSE:

(CLICK ON CHART FOR A LARGER VIEW)

$SPY #Options – #DayTrading calls on a FED day

The Federal Reserve announced its actions Wednesday in what was going be a foregone conclusion – nothing new, more to come.

So call that bullish.

CLOSING FIRST HALF:

CLOSING DAY TRADE:

$SPY #Options – #DayTrade on call Monday

The option day-trade play was the at-the-money 321 call for a 53% profit on one half and a 170% profit on the second half.

See tweets below for time stamps.

TRADING STRATEGY:

Buying SPY Puts And Calls

PROFITS ON HALF:

END OF THE DAY TRADE:

(Click on chart for a larger view)

#MarketTiming looking for a swing leg up…UPDATED.

This is a results update for this post yesterday:

#MarketTiming – looking for a swing leg up…

#ShortStrangles – $TSLA marching through March for a 62% gain…

Day trading weekly short strangles on TSLA, even as the market swung wildly both up and down, has turned out a steady 62% gain for March.

The total cash gain per options contract for the month was $10,969, using a maximum margin of just under $18k. Every week had a double-digit gain.

See the green-colored weekly totals and the final yellow-colored cumulative total for the month on the table below.

Each short strangle had a hard %200 stop loss. If stopped out the strangle is rewritten for new strikes calculated on the stop’s price level. Each trade is closed at the market at the end of the day to eliminate overnight risk.

The same short strangle strategy can be applied to any volatile stock with liquid weekly options – TSLA here, but other prospective stocks would include AAPL, NVDA, BA, ROKU, GS, FB, WYNN and NFLX. No doubt others from time to time depending on market conditions and an individual stock’s story (for instance, BA of late).

The reference for this strategy is this link: $TSLA – Day trading short strangles for simplicity’s sake.

There are many complicated options strategies but this blog strives to apply the idea that simple is best, or at least better…

Remember this information is presented here, and throughout this blog, for entertainment purposes and as my personal journal for trading and tracking strategies, and should not in any way be construed as investment advice.

(CLICK ON THE TABLE FOR A LARGER VIEW)

$TSLA – #DayTrading #ShortStrangles for a steady 15% weekly gain

Despite being stopped out twice during the five days last week, TSLA short strangles once again had a double-digit gain, 15%.

This strategy since introduced here six weeks ago, in early February, on TSLA, a volatile stock with liquid weekly options, has had a double-digit return every week.

The cumulative gain is now 76% for the six weeks on a maximum margin requirement (as calculated by the CBOE) of $20,000 per contract.

The values on the table below for last week’s short-strangle trades are per contract.

The reference for this strategy is this link: $TSLA – Day trading short strangles for simplicity’s sake.

(Click on the table for a larger view)

#ShortStrangles on stocks – the weekly on $SHOP WITH UPDATES

Didn’t get around to posting this on Twitter Monday to get the real-time stamp as is often my custom with trades like these but now that’s it is stopped out, I thought I’d note it anyway.

I first wrote about this short-strangle strategy in this post in September:

#ShortStrangles on #Stocks – stealing money weekly in cash

As per the strategy, this was a position to be taken 30 minute into the open Monday (see the green vertical line on the chart below for reference). SHOP closed that bar at 441.01 which made the short strangle an out-of-the-money 450 call and the 430 put, a ten-point spread on each side of the stock price and a 20-point spread over all. The option expiration was this Friday, 1/17.

The stop loss was on a five-minute close by the stock above or below either strike.

If all went well, meaning SHOP stayed between 450 and 430 for the week both the call and the put would expire worthless and earn approximately $850 per contract, a 9.6% gain on the cash margin required for the trade.

All did not go well as the stock broke 450 this morning (see the red line on the chart for reference), which closed out the strangle. Still there was bit of profit, about $183 per contract, 19% on the price of the strangle, 2% on the margin required. SHOP could fade back below 450 by Friday’s close (which wouldn’t surprise me) which would reap the full reward for the strategy but this stop discipline is crucial, otherwise this strategy can have unlimited losses.

UPDATE: At the close of the week SHOP did not slip back below 450 but the flush in the call premium, along with the put going worthless, would have this strangle gaining approximately $427 per contract, a gain of 4.8% on the margin requirement. But it would haven’t taken a different stop-loss strategy to capture the end-of-the-week return.

P.S. Shorted a 460c/440p strangle on the bar after the other stopped out for a potential gain of about $485 per contract on Friday’s expiration.

UPDATE: This strangle which replace the other went well with both the call and the put expiring worthless for a gain of about $475 per contract, a gain of 5.5% on the margin requirement.

(click on chart for a larger view)