Last week, I discussed how I’m shortening the time frames of trades I make for the Options360 Service and the approach has continued to pay off!
Those respective successes include Closing positions early with time until expiration as I did with McDonald’s (MCD) and Pulte (PHM) [seen in Wednesday’s article], or structuring a trade with a tighter time frame from the beginning as I did with Costco (COST), which was set up using options that expired in just three weeks — closed for a 57% gain in just three days.
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An advantage of using shorter-dated options is the leverage they provide. That is their delta or the price movement of the underlying shares being higher than longer-dated options. They also cost less on a dollar basis. However, this aspect can cut both ways — you either need to ‘right’ relatively quickly, or you risk facing steep losses since there’s less flexibility to hedge or wait for your thesis to play out.
Thankfully, the current market environment gives us ample set-ups where stocks are making big moves in short time periods.
This is also one of the reasons the SPDR 500 ETF (SPY) has become one of my favorite trading vehicles. I’ve been employing the ‘triple roll play’ I described earlier this month. This is an options strategy that makes use of the FCAT. The SPY has options that expire each Monday, Wednesday, and Friday. This allows me to think up several intra-week rolls to quickly bring a position’s cost basis down to zero, making it a no-lose situation.
For example, last Thursday I bought a SPY put with the 386 strike that would expire on March 26. I simultaneously sold a SPY put with the 385 strike that expired the next day on March 19 for an initial cost of $1.10, or $220 for a two-contract position. The very next day, last Friday, I rolled the short 385 put to Monday’s expiration for an $0.85 credit. This brought our cost-basis down to a mere $0.35. On Monday, I rolled the short put to Wednesday’s expiration for an additional $0.65 credit, bringing the position to a $0.30 net credit meaning at minimum, we’d have a profit of $30 per contract. On Wednesday, I rolled just half (1 contract) of the short 385 puts to the Friday expiration bringing in another $0.25 credit guaranteeing us a $55 profit. Today, when the SPY opened sharply lower, I closed the position for a $468 profit or a 225% gain from our original $2.20 cost for the two contract positions.
What’s great is not just achieving this kind of return in just one week, but that the strategy never had more than $220 at risk. And with each roll, that risk or our cost was being drastically reduced.