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)

$SPY #Options #DayTrade – recent tweets

Keeping up, up with the #Nifty50StockList

Updates for this past week’s upswing are in this link:

The 50 Stocks rise as the NYMO/NYSI turns up

The Strategy

Again and again, my nifty-50 stock list moves from oversold to overbought and back again to oversold like an ever spinning wheel within the market’s spinning wheel…

And each time there are 40 or more of the 50 stocks on sells, it’s time to sit up and take notice since that is the number that most often signals either the bottom or the beginning of a bottom on each down swing.

I first posted about this strategy in November of 2015 on another forum.

Nothing has changed since then.

Usually it just takes one day of 40 sells, sometimes two days, to set up the bottom of a swing. Should be noted if it goes more than two days that’s is a warning that something bigger may be in the offing (last time that happened was the start of the Covid-19 bear plunge this year).

This is just an FYI since the signal is once again close by.

This is what market timing and swing trading are all about.

The results can be quite remarkable, in leveraged ETFs like TQQQ, TNA, leveraged sector ETFs like SOXL, FNGU, and, of course, hot individual stocks.

The purple marking on this chart are each time there were 40 or more of the Nifty-50 on sells.

THE DAY-TRADING DAZZLE OF BUYING OPTIONS UPDATED

FIRST PUT TRADE

SECOND PUT TRADE

This chart is set to display return per $1K in play in the white flag or horizontal line on the right axis (the #1Kdaytrade on Twitter), and the #10Ktrade in dollars in the green flag or horizontal line on the right axis, which also makes for easy percentage calculations.

THE TRADING STRATEGY

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, like everyone in options trading says?

For day traders it doesn’t have to be. If the trader is persistent, discipline and experience, it almost never is.

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 day-trade scalping with the weekly calls and puts on various liquid stocks. Must be stressed the key to trading the weekly stock option is liquidity in order to avoid spreads too wide to turn around a profit during a single day.

One last note: again, the key, as always, is persistence, discipline, experience, and an entry signal the trader is comfortable taking.

$AFRM – from “hot” to “hotter” UPDATE

AFRM from hot to chop to hot again…

(CLICK ON TWEET TO SEE FULL CHART)

1/14/2021

AFRM had its debut in trading yesterday.

As per the Buying IPOs For Dummies strategy the high of its IPO day at 103 was the trigger to buy the stock. It triggered on the today’s open. In day trading on a pullback, there was a intra-day buy at 107.80. That is the day-trade entry and could be the long-term entry for investors if one is a holder instead in a trader.

The stock has been as high as 139.98 today.

The stop as of this writing, is either at breakeven for the day trade or on a break of 103 long term as per the IPO strategy.

(CLICK ON TWEET TO BRING UP VIEW OF THE CHART)

Simple Trades In Options – a 44% day trade

Published this today on Medium.com as an introduction on that platform.

Welcome to The God of Trading.

Here and on Twitter, the use of the title “The God of Trading” is a homage to he who rewards persistence, discipline, experience, and absolutely nothing else trading the financial markets.

The intent is to journal day trading and swing trading signals that can but used by anyone market timing to make trading and investing as effectively simple as simple can be, and to keep a record of involvement in the stock and options markets.

All content is presented as entertainment, not investment advice. If this is a guide so be it, but all traders and investors must use their own due diligence and market knowledge to make their own trades.

That having been said below is chart of a SPY Options day trade today (1/13/21) based on this strategy published here:

THE DAY-TRADING DAZZLE OF BUYING OPTIONS

SPY 378 Call, expiring today. Finished up 44%, $448 on a $1K trade (7 contracts). The actual trade topped out at more than 100% intraday before finishing with the 44% gain on the close.

The signal for the call, which is color-coded on the chart, is based on SPY, not on the option itself.

(CLICK ON THE CHART FOR A SEPARATE VIEW)

#SwingTrading – “Buy when the market tells you…”

Kennedy Gammage, the late great market timer, used to say “Buy when the market tells you, sell when the stock tells you.”

He could just as easily said “buy when the market tells you AND when the stock tells you.”

That is what this story is about.

Mr. Gammage’s market tools were the McClellan Oscillator ($NYMO) and the McClellan Sumation Index ($NYSI). The NYMO is a short term market-breadth indicator based on the New York Stock Exchange Advance/Decline line, and the NYSI is its longer-term brother.

Taken together, they are the clearest indication of mass market psychology which is to say: market direction, up or down.

When the NYMO and NYSI rise, it is time to buy stocks, ETFs, calls, futures, whatever money-maker one likes best.

That is the market telling you to buy…simple as that, and do not argue.

Now throw in my nifty-50-stock list (see its own story below) as it moves, again and again, from oversold to overbought and back again.

Each time there are 40 or more of the 50 stocks on sells, it’s time to sit up and take notice since that is the number that most often signals either the bottom or the beginning of a bottom on each down swing.

Once 40 more sells have registered on the list, it is time to take note of the NYMO to get market direction to trigger the buy, or if longer-term breadth, measured by the NYSI, is rising when 40 or more sells register on the list that is to time as they say in the market to “buy the dip” in an on-going up trend.

This is what market timing and swing trading are all about and the returns can be both rapid and remarkable.

#MarketTiming swing bottoms with 40 plus sells on the #Nifty50StockList

Again and again, my nifty-50 stock list moves from oversold to overbought and back again to oversold like an ever spinning wheel within the market’s spinning wheel…

And each time there are 40 or more of the 50 stocks on sells, it’s time to sit up and take notice since that is the number that most often signals either the bottom or the beginning of a bottom on each down swing.

I first posted about this strategy in November of 2015, one of the first entries on this blog.

Nothing has changed.

Usually it just takes one day of 40 sells, sometimes two days, to set up the bottom of a swing. Should be noted if it goes more than two days that’s is a warning that something bigger may be in the offing (last time that happened was the start of the Covid-19 bear plunge this year).

This is just an FYI, but it is what market timing and swing trading are all about.

The results can be quite remarkable, in leveraged ETFs like TQQQ, TNA, leveraged sector ETFs like SOXL, FNGU, and, of course, hot individual stocks.

The buy signal is the open of the first day after the Nifty50StockList ceases to have 40 or more stocks on sells. Stops are at whatever price level on whatever is bought based on each trader’s risk tolerance.

On the chart below the 40-plus sells are marked with purple paint bars.

(click on the chart for a larger view)

#MarketTiming the #Nifty50StockList – Marking progress in $QDEL

Today, a look a back at the swing signal and upswing in QDEL, number 25 on the Nifty-50 stock list.

Up 27% since the swing signal in an oversold list since the buy on the open 9/09, 13 trading days ago.

#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.