There are no two ways about it, the S&P 500 had a remarkable performance last year, rising almost 29% in 2019. Most investors would find that to be a hard performance to beat, but in this video we’re going to show you an extremely simple options trading strategy that, if implemented carefully, could have performed MORE than twice as well as the S&P 500 did last year.
View Video Transcriptthere are no two ways about it the S
500 index had a remarkable performance
last year rising almost 29 percent in
2019 I’m pretty sure that most investors
would find that to be a hard performance
to beat but in this video we’re gonna
show you an extremely simple options
trading strategy that if implemented
carefully could have performed more than
twice as well as the S&P; 500 index did
last year and that’s saying something
I’m the head trader of SMB capitals
options trading desk in Manhattan I can
tell you from experience that most
traders and investors just don’t think
that certain returns are possible but
auctions create unique opportunities for
profit that most other trading
instruments just can’t deliver so if
you’re interested in an easy to learn
strategy that could have beaten the
market by more than 100 percent in this
stellar 2019 equities market then stick
around because I think you’re going to
be pretty surprised at how easily this
could have been done
[Music]
hi I’m Seth Freudburg I’m the head trader
of SMB capitals options trading desk SMB
capital is a proprietary trading firm
located in midtown Manhattan and we
provide capital for options and equity
traders from all over the world trading
both remotely and in our offices here in
New York City now I’d like to suggest
you click on our subscribe button right
now so that you don’t miss any of our
free trading videos that we produce for
the traders and investors all over the
world they’re really very valuable ok so
one of the great things about options
income strategies is that they can be
adapted to accommodate trading signals
so that the combination of a simple
option strategy and a commonly used
trading signal can be incredibly power
powerful if you know how to apply them
together now in the case of the equity
markets one of the most widely watched
indicators is the 200-day moving average
when it’s breached to the downside many
traders fear that a bearish trend has
developed and so lots of traders tend to
get bearish when that average gets
breeze breach so let’s say that you
wanted to use that indicator as a signal
to get in and out of bullish options
trades that could be a reasonable thing
to do and so I’d like to work through a
particular option strategy known as the
put credit spread and let’s study how it
should have performed in 2019 if
utilized in a certain specific and
easy-to-understand way now before we get
into that I just want to spend a minute
to make sure that everyone watching this
up to speed about the basics of the way
options work so that they can follow
this study that we did and realize why
it should have beaten the hell out of
the market returns in 2019 now most of
you are probably familiar with index
options which are the options that are
used in this example but there may be
some who just have a passing knowledge
of how they work so I’m gonna do a quick
basic review of the basics so that
you’ll all be able to understand this
strategy for those experienced options
guys out there don’t worry this is going
to be quick and then we’ll jump right
back into the guts of the lesson so
you’re probably all familiar with how
equity options work with equity options
a call buys you the right to buy one
hundred share
the stock at the strike price is that
option anytime before the option expires
and a put option entitles you to sell
100 shares of stock at the strike price
of the put before that options expires
but there are also index options which
works similarly to equity options except
that there’s no such thing as 100 shares
of an index like the S&P; 500 so you
can’t really buy or sell 100 shares of
an index but what you can do is get paid
in cash $100 per point if the index
expires above the strike price of an
index call that you buy or alternatively
you’d be paid $100 per point for each
point the index drops below the strike
price of your index puts so for example
if the SPX index is trading at 3,000 and
you buy the 30 10 call if the SPX goes
to 30 15 you should receive $500 in your
account if the index closes at three
thousand and ten or lower your call
expires worthless on the other side of
the ledger if you buy a twenty nine 85
foot and the market sells off to 29 75
you’d make $1,000 but if the market just
sold off to 29 85 or higher the put
expires worthless so those are the
basics of index options now it’s
important to be clear on what index
options are because we’re talking about
a strategy that we want to compare to
the performance of the S&P; 500 index in
2019 so we’re going to use index options
to implement this strategy okay so first
of all we could establish a rule that
the trade will not be implemented unless
the sp500 index is trading above its
200-day moving average as that’s a
bullish trade and furthermore when we do
implement the trade if at any point
during the trade the market closes below
the 200-day moving average for more than
three days then we can see that as a
signal that the market is probably going
to turn bearish and thus close our
bullish trade and wait for another
opportunity to get back involved in the
trade once the market remains above that
200-day moving average so let’s take a
look at the chart of the S&P; 500 in 2019
as you can see the first time the market
moved above the 200
day in 2019 was in early February
remember the market had a hard sell off
in the final quarter of 2018 so it took
a little while for that to be overcome
in terms of the moving average so let’s
suppose that when we’re in this
condition when the market is above the
200-day moving average we could enter
into a put credit spread way below the
market for safety now virtually every
broker that allows you to trade options
provides provides you with some metrics
on the options you’re trading and those
metrics are called the options Greeks
the options Greeks are various
sophisticated measures of how options
react to changes in the price and
volatility of the underlying stock or
index that the option is derived from so
one of those Greeks is called an options
delta and it’s basically measuring how
much the price of an option should move
based on the movement of the stock or
index that the options derive from the
farther an option strike is from the
market price of whatever you’re trading
the smaller its delta is so for example
if the SPX index is trading at 3,000 and
the strike price of a put option is that
say 29.95 just five points below the
price of the index then that option will
have a delta of around fifty but if the
strike price of the put is twenty eight
hundred two hundred points below the
market then the delta could be as little
as five or ten depending on how far the
option is from its expiration date so
that’s a very high-level summary of
deltas okay so getting back to our trade
if we have a protocol that as long as
the market is above its 200-day moving
average then we’re going to sell a put
at ten delta way below the market price
on an option that expires in 60 days in
other words two months from now
so in 2019 the first opportunity we
could have had to do that should have
actually been February 12th so on that
day the SPX was trading at twenty seven
forty five and the ten Delta option was
way down there at 25 75 170 points below
the market so on that day we sold 10 of
those 25 75 puts for $19.25 each below
that we bought
ten points lower ten of those 2565 puts
for protection at an $18 price so if the
market really starts to sell off that
long put at 2565 it gets activated as a
protective hedge against the short put
options we sold 10 points higher at
twenty five seventy five now let’s drill
down and try to understand what exactly
is going on here and how this trade
works so this formation where we sell a
put way below the market and then buy a
put even farther down from the market as
protection that’s known as the put
credit spread now let’s take a look at
how this works when we sell the 1575 put
we receive $19.25 times 100 times 10
because we sold ten of them so we
received 19,000 $250 then we moved down
to the 1565 puts that we bought and
you’ll see that we had to pay $18,000
for the ten of those netting us cash
flow of $1,250 now your broker for
margining purposes should require you to
have about eight thousand seven hundred
fifty dollars for this trade which is
the worst case scenario loss on the
trade by the way so therefore that’s
really the capital that we’ve invested
in the trade which makes sense because
the puts we sold are so far from the
market a hundred seventy points below
the market in fact that the market has
to take quite a dive for either though
either of those options to be activated
and so the risk in the trade is larger
than the reward but the reward is very
very likely to happen because then only
one instance where the market goes down
a lot do we lose on this trade if the
market goes up goes nowhere or goes down
modestly we should win the trade as
you’ll see in a minute now the rules of
the trade are that we should stay in the
trade as long as the market stays above
the 200-day moving average as we
mentioned if it falls below the 200-day
then we should wait three days and if
one the third day it closes below the
200-day moving average we would close
the trade that way we avoid the noise of
a small market move below the 200-day
which gets bought up quickly but if the
profit on the trade is greater than 90%
of the original cash credit that we
received we should close
the trade for a profit so now let’s move
forward to March 28th and as you can see
we’re still in the trade the market did
very briefly move below the 200-day
moving average but it quickly rebounded
so we didn’t hit out of the trade so now
on March 28th we’re only 15 days before
these options expire and we’ve been in
the trade for 42 five days so let’s
analyze where we are exactly on the
position being 15 15 days from
expiration you can see that the prices
of the options have dropped quite a bit
that 2575 that we sold for $19.25 it’s
now bound to a dollar 15 and the 2565
that we bought for 18 is now down to a
dollar five so at this point you close
the trade and let’s run through exactly
why you’d close it so originally you’ll
remember that we received 1200 $1,250
for the combination of selling the 1025
75 puts and buying the 1025 65 puts we
needed
$1,250 out of that transaction well what
if we wanted to close the trade well at
this point we’d have to pay a dollar 15
the market price of the put now to close
our short position at 25 75 and we’d be
able to sell our long 2565 for a dollar
five so if you do the math we take our
original 1250 that we received we spend
1150 to buy back the ten short puts at
twenty five seventy five and we sell the
long puts for ten fifty so we’re left
with cash of $1,150 well remember we
said we should close the trade when our
profit has attained at least ninety
percent of the credit we originally
received and as you can see we can close
the trade for a 92% credit and so
therefore we’ll close the trade and
pocket the $1,150 now since we’re still
above the 200-day moving average we
could simply reopen another trade as
soon as an options chain opens up which
is 60 days out and that happens on April
9th now on that day the SPX had rallied
up to 28 77 and was still well above the
200-day
moving average so we could go ahead and
sell the 2715 puts which are the ten
Delta puts we talked about and by those
2705 puts for protection now you’ll
notice we receive nineteen dollars and
forty cents for the twenty seven fifteen
puts and we’d have to pay eighteen
thirty five for the twenty seven oh five
foot so if you do the math we’ve
received one thousand and fifty dollar
credit this time for an initial
investment of eight thousand nine
hundred fifty dollars now before we run
through how this trade worked out as
well as the equivalent rates for the
rest of the year I wanted to mention
that we’re currently running a two our
free intensive workshop at the moment
we’re all be teaching you three
real-world option strategies the
professional options traders use
including a really simple but incredibly
effective strategy that some of the
greatest investors in the world like
Warren Buffett use all the time plus an
options trading strategy that has a
statistical eighty percent probability
of profit month in and month out plus an
option strategy that you can employ with
a stock that you like where you’ll make
your target profit whether the stock
goes up goes nowhere or even goes down a
small percentage so if those strategies
are interest to you then you should
check out the free options class that
we’re currently running just go ahead
and click the link that should be
appearing now at the top right corner of
your screen that should open the free
registration page in the new window so
don’t worry you won’t lose this video or
you can just go on over to options class
com to register for this free intensive
workshop it’s a rare opportunity for
retail traders and investors to learn
directly from Wall Street traders but
that’s exactly what you’ll be getting
through this free online workshop so
click the link to sign up now and don’t
miss it okay so now we’ve entered our
second trade in our 2019 put credit
spread campaign and you’ll see that
we’ve moved forward to June 5th and the
SPX is actually sold down to 2018 but
with only three days left and the puts
being more than 100 points below the
market there would have to be a hell of
a sell-off for those options to actually
pay off and so the market was assigning
very little value to them well again
reached the point as you can see where
we can close the trade for in this case
so little that we were able to hang on
to 95% of that original $1,050 credit
because it only cost us $50 to close the
trade and as long as the SPX stays above
the 200-day moving average and doesn’t
close below it for more than three days
we should throw on another trade sixty
days out from expiration so it turns out
that the conditions were acceptable
according to our trade standards four
more times during the year in early June
in late July in September and November
of 2019 so we were able to execute the
trade six total times during the year of
course only when our conditions were met
and here are the results with a little
under $9,000 deployed on six trades
spread throughout the year the results
were obviously impressive a 67 percent
return on capital mind you we were out
of the market for a number of months
where our trade standards were not being
met that’s well more than twice the
incredibly impressive twenty-nine
percent returns of large cap stocks in
2019 where you’d have to have been in
the market the entire year to appreciate
those kinds of returns so what I’d like
you to take away from this video is the
fact that it can be extremely powerful
to combine the principles of options
income trading with market indicators
like the 200-day moving averages we did
with this simple put credit spread
program triggered by the market trading
above the 200-day moving average when
you do this you can get surprisingly
superior results compared to the
performance of the underlying dick
indexes if you understand how to
position your long and short options in
the statistically correct locations in
relation to the market and have the
discipline to stick to your trading
playbook because you have confidence
that should work out from back testing
and live trading experience just to
remind you as I said earlier if you
enjoyed this video and learn something
valuable from it and you’d like to learn
the details of three real-world option
strategies that professional options
traders use all the time then you should
check out the free options class that
we’re currently running just go ahead
and click the link that should be
appearing now at the top right corner of
your screen that should open up the free
registration page in a new window so you
won’t lose this video don’t worry or you
can just head on over to options class
com
to register for this free intensive
workshop it’s really a rare opportunity
for retail traders and investors to
learn directly from Wall Street traders
but that’s exactly what you’ll be
getting through this free online
workshop so click the link to sign up
now and don’t miss it okay so now I’m
interested in hearing from you what
indicators do you use in your trading
that you think might lend itself to
options income strategies such as to put
credit spread I’m really interested to
see what you’ll suggest we’ll do another
video like this to test out the best
ideas we get showing how we could apply
options income strategies to express the
directions suggested by your indicators
and let’s see what happens I’m really
looking forward to what indicators you’d
suggest so please comment those below
* no relevant positions
