The SPX Spread Trader
This strategy is designed for traders who can’t monitor the market constantly. It’s straightforward to follow, as we provide precise entry and stop prices, with updates throughout the day. The approach involves setting up a vertical credit spread with SPX weekly options on expiration day. The aim is for both options to expire worthless, allowing you to retain the initial credit received when the spread was opened. This strategy has delivered over +600% return in 2024!
What is a Credit Spread?
A credit spread involves selling an option at one strike price and simultaneously buying an option at a different strike. In the SPX Spread Trader, we typically use a 5-point spread between the two strike prices. For instance, if we sell a 2480 call, we simultaneously purchase a 2485 call. By entering this as a single credit spread order, you’re charged only one commission fee. The difference in premiums between these two options results in a net credit to your account.
The advantage of this strategy is that no significant price movement in the SPX is required to be profitable. Even if SPX stays flat or shows minimal movement, the trade can still be profitable. All we need is for the SPX to close below 2480 (in this example), allowing both options to expire worthless and enabling us to retain the credit.
The maximum potential loss for each SPX credit spread is calculated by subtracting the received credit from the margin requirement per contract. For example, if you collect a $1.00 credit, the maximum loss per contract is $400 (excluding commission). The margin requirement for SPX options is $500 per contract. However, in practice, losses are often less than the maximum. We generally target a credit of at least $1.50 per spread, with an average of around $1.75 or more per contract. The success of this strategy largely depends on the accuracy of our forecasts. With consistency, this accuracy allows for profitable trades.
This strategy is more advanced and not suitable for everyone. It requires the appropriate options trading approval in your account and comfort with trading vertical credit spreads. While the profit per trade is capped, so is the potential loss. It’s crucial to fully understand the risks and mechanics of credit spreads before trading. If you’re unsure, consult your broker for guidance on how to execute these trades on their platform.
The SPX Spread Trader requires a margin account. It’s essential for traders to fully understand the risks associated with options trading and to have a sufficiently funded account for a stress-free trading experience. Having adequate capital helps ensure effective management of potential risks.
If you’re new to spread trading, be sure to check out our step-by-step guide on how to place an SPX credit spread trade
A single trade per day
We exclusively trade on expiration day, which, thanks to recent market changes, now occurs five days a week. Historically, this approach has yielded over a 33% return on margin (ROM) per month. When evaluating returns on credit spreads, traders typically focus on ROM rather than return on investment, as the margin requirements for each trade serve as a practical measure. While the actual return on investment may be higher, using ROM offers a more consistent way to assess performance.
This strategy has proven to be an effective way to grow an account, particularly for traders who cannot monitor the market throughout the day. Although past performance does not guarantee future results, we’ve found this to be a reliable method for supplementing trading profits with minimal stress and time commitment.
Entry
We normally enter our credit Spread at 9:35 am EST. We send out an email and post the trade details on our website. The information is simple and easy to follow. Here is an example of what our entry alert looks like:
Open SPX Vertical Credit Spread
Sell to Open .spxw170901c2480 (SPX weekly option: call, strike 2480 expiration 09/01/17 )
Buy to Open spxw170901c2485 (SPX weekly option: call, strike 2485 expiration 09/01/17 )
For a minimum credit of .65
If we are unable to enter the trade at the minimum credit desired before 10:30 am EST, we will cancel the order and there will be no trade for the day. Once we enter the trade, we normally wait till the close of trading, with the goal being that all options expire worthless and then we keep the credit made in our account. There are times we will exit the trade early, and when that happens we alert our members accordingly. But most of the time we prefer to wait and let the power of time decay work in our favor. A great approach for both volatile markets and during flat periods as the only thing required to make money on this type of trade, is that the market closes above or below that key level. Over 64% win ratio for this strategy has made this a very profitable and consistent way to produce results.
That’s it…now you have all the information needed to trade as we are trading.
How it works:
Here is an example of how we use this information in our trading. Using the above alert this is how we traded. We purchased a 2480/2485 Credit spread. When we entered our order we experienced a better fill than our limit (as we normally do) and we received a 1.07 credit. Which means we gained $107 for each contract. Then we simply waited for the market to close. If the SPX closed below 2480, we would make the full profit potential in our spread. If it closed between 2480-2485 our profit or loss would vary, and if it closed above 2485 we would have a loss of $393 per contract.
The market danced around all day, and closed at 2479 so both options expired worthless, just as we wanted and so we made the full profit of $107 per contract or +21% ROM. Not a bad day’s return for making one transaction early in the morning and then simply waiting. When we forecast a down day, we are buying and selling calls and when we forecast an up day we are buying and selling puts. If you have never traded a spread, it may sound confusing, but it really is quite simple. We provide you with the strike prices and the minimum credit limit that we are wanting. You can seek to mirror what we are doing, or develop your own approach.
Easy to Follow
This strategy was first made available to the public in September 2017. While past performance is not indicative of future results, imagine the potential—achieving this level of return with just a few minutes of your time each day. Sign up today for a free trial and see if our service can be of benefit to you.
Exits
No Trade Days
There are times when we believe it is better not to trade. This can be caused by a number of reasons. Sometimes market conditions are just too risky and so we won’t trade. Being a successful trader means sitting out of the market at times, and so we share when we are avoiding trading with our members. Also there are times where our desired credit cannot be obtained, and so we don’t trade on those days either.
Benefits of SPX Spread Trading
This trading style offers several advantages. It doesn’t require you to stay glued to your computer all day, nor does it demand split-second decisions about when to hold or exit. The maximum potential gain and loss are clearly defined before entering the trade. Additionally, it works well in both flat and volatile markets, as significant price movement isn’t necessary to achieve profitability.
Auto Trading is Available
Auto Trading is available for this strategy. For more information please see this page.
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*Historically we’ve seen over 33% ROM (return on margin) per month with this approach. When calculating % returns on credit spreads normally traders look at Return on Margin. The return on investment is actually higher, but due to the margin requirements for each trade we use that figure.