Deep in the money put spreads in a bull market.
I am sharing my journey through the options trading world and for over two years I have traded spreads the majority of the time. I began learning about straddles and strangled and started gravitating towards more defined risk vertical credit spreads, where I picked my niche and my trades explore the vertical spread universe. I alternate between high probability trades at the extremes of the curve, 90-95% probability during high volatility and closer to 75-80 percent probability during lower volatility times.
Lately I have been exploring variations on my strategy and I was attracted by the higher credits and smaller losses of deep in the money spreads. In general I trade deep in the money puts spreads when I am bullish and deep in the money call spreads when I am bearish on the underlying.
While these spreads have large credits and very small potential losses, they also differ in time of trade. They are long trades often 45-60 days out. Unlike high probability trades it’s unlikely you can get out the first week or even halfway in the trade. These trades are most profitable if you hold until close. And with these deep in the money spreads you need all of the time available most of the time.
I trade mostly index funds like SPX or SPY and occasionally smaller indexes. I stopped trading SPY early on because the exercise rate was high.
The SPY is an American style option where you can be exercised anytime. I started trading the SPX exclusively because the SPX is European style option so it can only be exercised on expiration.
The other advantage with s SPX was size, I trade a set % of my portfolio on each trade and I was buying 10 contracts in the SPY to use up the same percentage of my portfolio I would use on one contract on the SPX. That’s $1.33 on SPX versus 13.33 on SPY.
I will revisit this decision at some point soon, as cost per contract has lowered at all brokers, and I think a significant number of my exercises were around quarterly earnings with people deciding they wanted to buy or sell before the ex-officio date, which is when you need to own the underlying to earn the dividend.
These are my general guidelines when I trade ITM (in the money) put spreads.
ITM SPX Vertical spread
- Place ITM put spread with large profit to loss ratio
- Close when 50% of credit earned or let expire depending on SPX price action.
- Review all seven SPX trading venues
- High volatility
- Liquid options
- Need 42-56 Days to be right
- Roll early for more time
- Large premium, small max loss
ITM put strategy
Sell puts ITM far out, if SPX rise profit,
If SPX doesn’t rise enough, roll to the next month to give myself more time for the market to move in my favor. Start with large credit, loss some max profit with each roll, Additionally, If market reverses keep rolling until it comes back
I use these guidelines to Roll my positions.
70%
If SPX 1000, 2000, 2800
ROLL IF IT FALLS TO 700, 1400, 1956.
This is my first time to write out this strategy, so I hope it’s understandable. I am curious about what other traders are on this platform and I look forward to learning from other traders here.
Happy Trading,
Shortsegments
✍️ written by Shortsegments
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Options Investing: deep in the money put spreads in a bull market.
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That's exactly what it was. In the mid-2000s the bots started exercising ITM contracts to scalp dividends.
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Trading bots. A recurrent theme.
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There are some things that computers do much, much better than people. Short term trading is one of them.
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We were talking about put spread and the like on the LEO rountable call today. We have Khal hooked on them. You should join us on the call one day if you can.
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Thanks for the invite. I didn’t realize put spread trading was popular here.
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Yes, we would love to have you on the show so we can discuss your strategy ab it more, a visual would be a lot better. Thanks in advance.
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