Here’s How A Simple Options Income Strategy Could Have Easily Beaten The 2019 Equity Markets

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This simple options income strategy beat the 29% returns of the S&P 500 in 2019. Find out what the strategy is! Register for our free intensive trading webinar

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*SMB Disclosures*


Ian says:

I know very little about options and don't trade them yet, but I love piecing together everything I learn from these lessons, so thank you! That being said, you began this strategy by selling a put "at 10 delta" (2575) and buying a put 10 points below (2565) for protection. According to the option chain, 2575 is a 10.5 delta and 2565 is 9.7 delta. I would like to understand why you didn't sell the 2570 put instead (and buy the 2560), since 10.1 is closer to 10 than 10.5? Or is the idea behind this strategy to straddle the strike closest to a delta of 10? I also notice the initial difference between these are equal in price (i.e., $1.25), but the difference in delta is less for the 2570/2560 (0.76) than the 2575/2565 (0.80). It seems the 2570/2560 would have provided the same net cash flow after 45 days ($1,150), yet with slightly less sensitivity throughout the trade attributable to the smaller delta? (My breakdown is only based on evaluation of what I'm learning here in this video.) Cheers!

razzy p says:

Inside out!

razzy p says:

You got it Seth! .. beautiful! option strategy!
Worth studying inside which I will do Next!
Thanks great video!

Phlliph Ramsammy says:

How far back do we go back to check the 200 DMA?

Douglas Gantt says:

Annual Return is not 67%. You shouldn’t sum your Return, as this figure is a rate rather than a difference. To be correct, one would divide annual total profit by annual total expenditure. The annual return is closer to 11.25%. I enjoyed the video.

Ryan Duncan says:

For example let's say the the market is at 3000, we have a lot of indicators saying its bullish so were going to sell a put spread or just puts. Then increase our chances using chart data such as fib lines and support. And even further increase our chances by noticing IV is past 50%. Let's say all the indicators point up, we have high IV, and seeing huge support at 2900. We would then sell those 2900 puts using every bit of information we had at our disposal giving us extremely high chances of success. And repeat the process with a wide variety of trades on uncorrelated instruments.

Joseph Pfeifer says:

Why dont wait for expiration?

Chris Christenson says:

Are you only trading the monthly's on this trade or using weeklies also if it is 60 DTE?

DAGenao says:

Hi Seth, don't you consider Implied Volatility (IV) when opening a position? I'm mostly a seller of options (Put CS) when IV is high and a buyer when IV is low. I was surprised to see in your video that you only focus on the 200d MA. I had a very successful year in 2019 (30 percent return) by always entering the credit/debit spreads on the right side of volatility.
I use the 100d MA

beamerUSA says:

6:08 Its Greek to me

Ed Merzlak says:

What happens if the stock price ends between your spread the short put would be assigned but you would not exercise the long put. So what happens?

JT76 says:

And what if you had put the trade on in Oct, Nov, & Dec when it popped above the 200 day and then dropped below it significantly for more than 3 days? It would have wiped out months of profits if not more. And no mention of the most important variable when going short — IV? This is a typical short Vega trade that should only be utilized when IV is very elevated and you keep your position size small and spread your risk out across many positions. Take profits early and set a max loss at somewhere around 2x the credit you received to avoid getting shaken out unnecessarily but at the same time stop catastrophic losses. You’d be better off doing the opposite of what this video says and put the trade on after it has crashed through the 200 because then IV will skyrocket and there’s going to be enough premium in the trade to justify the risk and give yourself a statistical advantage because we know volatility is mean reverting. This kind of video gives virgin options traders just enough info to think they know what they’re doing and then get slaughtered. At least it’s using the SPX which has some stability I’ll grant that.

Lindee Burton says:

Looking for delta ~ 10; only see delta 0 to 1. What am I missing? Please.

Thomas Lee says:

For most option spreads, one leg has a profit while the other leg has a loss. How would these trades be affected by the WASH tax rule? I am thinking of actively trading the weekly SPY option spreads.

Entrepren says:

Good directional/bullish trade – I think it is better with more rules about what constitutes a great entry point. I'd want to see several data points confirming the chances of increasing prices are higher rather than lower (rising RSI, SPX in the lower part of its recent range, etc.). I'd also tighten up my exit rules. This is a ten-day trade with little time to react, so I might exit as soon as my losses equal half of my credit or something similar. By looking at the one-year chart, you can see several times where bullish trades would've been broken in the first 2-3 days, so that's not shocking. It's still a good trade, but again, I'd tighten up the entry and exit points in recognition of real-world SPX performance.

George Mitchell says:

Thanks for the video I use the 50 and 200 sma.

Entrepren says:

RSI (one-year daily chart on SPX) is one of my key indicators for options trading. If RSI drops below 46, that's an exit signal for me. At that point, risk is substantially increased, and predictability is low. When RSI rises above 50 again, I'm okay to reenter if my other conditions are met.

Alvin Woo says:

Doesn't the math not work out here? You are winning all your trades and once the market turns bearish and hits your long put or close below it, you lose all your gains for the whole year. The expected return calculation just doesn't work out even if you win 90% of the time. Its only a matter of time that a loss will come and wipe out all the gains.

leigpx says:

Is delta calculated differently in different platforms? Using ThinkorSwim options in that range show as -0.10

James Soriano says:

True or False: Using a value of Delta to place an options trade is a substitute for, not a supplement to, technical analysis. I’d say the answer is True:  delta replaces the 200-day moving average and all other technical indicators.  If the trader’s going to place a 10 delta put credit spread, then he need not be mindful of the 200-day moving average.  Think about it.  If the market takes a steep dive of several weeks’ or months’ duration, then the 10 delta value adjusts strike prices downward accordingly.  Thus, there’s no need to be “out of the market” if the SPX is below the 200 DMA.  

The SMB Capital strategy discussed by Seth here makes a debatable distinction:  (a) be mindful of the SPX spot price in relation to its 200 DMA, and (b) if condition (a) is satisfied, then place a 10 delta put credit spread with a 60 DTE.   But delta absorbs the moving average. It takes it into account. There is no technical indicator outside the probabilities implied in any delta value.

As Seth says, delta is a measure of an option’s price sensitivity in relation to the price change in the underlying asset.  But it also has one or two further definitions, including providing a probability estimate of the liklihood that the option will be in the money at expiration.  A 10 delta put credit spread implies a 90 percent chance of being in the money by at least one cent at expiration.  That probability adjusts up and down with the vicissitudes of the market, bullish and bearish periods alike.

Think of two Venn diagrams.  Seth’s saying that there are two circles next to each other, but not touching:  one labeled “200 DMA” and the other labeled “10 delta strike price.”  The strategy first looks at circle one and then at circle two. I would draw the circles differently.  I would draw a large circle called “delta” and a smaller one located entirely within it called “200 DMA,” so that every point belong to the "200 DMA" is also a point in the larger circle called "delta."  The moving average is nested within delta.  It’s not a stand-alone measure.

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