$SPY OPTIONS – buying calls and puts in a fool’s game of “dailies”

I was going to do a wrap-up of the returns for the first quarter in what I tongue-in-cheek called “the fool’s game” but decided not to because I doubt anyone would believe it.

Even after trading it (off and on) and tracking it (completely) I have trouble believing how astounding it is myself. See note below.

THE FOOL’S GAME – BUYING CALLS AND PUTS

I had tried trading options 30 years ago when I first started trading and it was obvious I didn’t know what I was doing. After being inundated by deltas and thetas and gammas and IVs, as well as strategies like verticals and calendars and strangles and straddles and busted wing whatevers, iron condors, I got killed ever time I tried to put all that stuff to use. It was just too big a jungle to juggle for the average guy.

It was an iron condor that finally told me I had to quit. How anyone executes a four-legged trade in options, going in and coming out, was way beyond me. It still is.

So what to do? What to do?

Do what I do in every other aspect of my trading for the past 30 years – simplify, simplify, simplify. The market either goes up or it goes down. Why wouldn’t it be the same for options?

But in options one is told BY EVERYONE that in buying puts and calls only three things can happen and two of them are bad. It either goes your way right away (the one good thing) or it goes against you (obviously a bad thing), or it goes no where and dies in time decay (the other really bad thing). What to do? Can’t do anything about the “for you” or the “against you” but time decay can be reduced if not eliminated by day trading. Not much decay with a buy on the open and a sell no later than the close.

Last fall I tracked this on the SPY monthly options, but by the beginning of the year, I tracked and started trading the at-the-money weekly options (for a bigger bang to the buck). Much of the tracking had be done manually and by trial and error because the strikes change often daily with the SPY movements, but the trading could be automated in TradeStation. In looking back at the end of the quarter I discovered that most of the really big winners, which I define as more than a 100% gain on the day, came on Fridays, the day of the weekly expiration (8 out of 14 of the big winners).

The day of the expiration? The thing of it is SPY now has options expiration days on Monday, Wednesday, and Friday. It seems possible the Friday expiration phenomenon could be present Monday and Wednesday too.

Call it day trading the dailies.

Which brings us to today. Granted it was a big one but in options lots of days are big ones. The SPY 263 in-the-money put expiring today netted 238% on my date-trade signal. And the same 263 puts for Wednesday and Friday trailed with 110% and 85% respectively. (The white flags on the right-hand axis in the charts below show the total gain for $10K traded, so chosen to also correspond to a percentage gain.)

Not a bad start to a quarter.

NOTE: Probably should say something about the first quarter in this “fool’s game” just for the record… There were 62 trading days in the quarter with 40 of them profitable for a win rate of 64%. Not going to say how much it made overall (everyone would say “oh, come on, that can’t be!”) but think about these numbers… As I said above there were 14 big winners of 100% or more. The biggest winner in the calls was 252% on 3/9. The biggest winner in the puts was 265% on 2/2. The biggest winning week was the week of 2/5 to 2/9 at 650% and the biggest losing week was 3/12 to 3/16 for a negative 208% (obviously one does not trade this strategy with one’s entire account).

All of this is simply buying calls or puts as day-trades.

(click on the chart for a larger view)

IS IT A “Fool’s Game” ?

There are so many options strategies in the stock market the head spins – a straddle, a strangle, a naked and/or a covered put and/or call, a calendar, a condor, an iron condor, an iron butterfly (isn’t that a rock band?) and any combination of any of these for hedging purposes, for capital appreciation or preservation, for gambling. Mind boggling.

But buying options… Buying options, just plain buying a call or a put, everyone will say is a “fool’s game.”

Regardless of whether a trader buys calls or puts on index ETFs like SPY or QQQ or IWM, or buys options on stocks, there are only three things that can happen – the option goes the trader’s way (good), or the option goes against the trader (bad), the option goes sideways with price decay over time (also bad).

Two out of the three possibilities for the option buyer are losers. What fool would want to play that game?

But is it really a fool’s game?

Doesn’t have to be. Not for day traders.

Let’s take SPY options as the prime example — very liquid across multiple strikes, tight spreads, hardly any time decay on a trade for only a day, a stop-loss is close by and immediate, and the profits, if there is a trend for the day, can be substantial, even rather astounding.

Also great for scalping on any time frame intraday.

The key, as always, is persistence, discipline, experience, and an entry signal the trader is comfortable with taking.