Transcription
In this video, I'm going to show you an option strategy with 90% win rate and $84,000 in total profits. This is a mechanical option strategy on SPX index options. It's easy and beginner-friendly. It is small account friendly. You can make these trades with as little as $500, but you can scale it up to as high as you want. It is passive and does not require watching a lot of charts. It was profitable even in the bare market of 2022 when the market went down by 28%. It is set and forget and does not requires day-to-day trade management. We can trade one ticker like SPX or you can also use this strategy on other tickers like triple Q or large cap stocks like Apple, Microsoft, Google, Amazon. It works very well on all of them.
My name is Ravish and I am a full-time option seller. I specialize in passive options income strategies and I have made multiple seven figures in profits. If you like this video, hit the like and subscribe button so I can share more strategies like this with you.
Before we go into the strategy, just a quick disclaimer. This video is for education purpose only. I'm not a financial advisor and this is not an advice for you to invest in any instrument or any strategies. Do your own research and understand the risk before trading options.
For this strategy, we are going to trade vertical spreads. If you're new to options, let me explain how it works. In a vertical spread, we buy one option and sell another option of the same type, same expiry date, but different strikes. There are two types of vertical spreads. Credit spreads and debit spreads. In a credit spread, we get paid to open the trade. In a debit spread, we have to pay to open the trade.
Then again there are two types of credit spreads and two types of debit spreads. We can either make a bullish or bearish trade using both types. So for example a put credit spread is a bullish trade. It is also known as bull put spread. In this trade we sell a put and buy another put at a lower strike. If you're selling a put credit spread we get paid to open this trade and we make profit if the market goes up or at least stays flat. If we buy a put debit spread, in this case we will pay a debit to open the trade and this is going to be a bearish trade. In this case we make profit if the market goes down or at least stays flat. If we sell a call credit spread that is going to be a bearish trade where we make profit if the market goes down or at least stays flat. If we open a call debit spread then that is going to be a bullish trade. We will pay a debit for it and we will make profit if the market goes up or stays flat. Now in this case selling a put credit spread is actually same as buying a call debit spread because both of them are bullish trades and selling a call credit spread is the same trade as buying a put debit spread. For this strategy we are going to use a put credit spread.
Let's visualize this trade setup using option strat. So you can understand how this exactly works. So in this case we are going to select SPX ticker and then select a date which is 2 weeks out. In this case, it's going to be July of 3rd. And then we are going to sell one put option at 50 delta which is going to be at the money strike. So the current price of S&P is 5980. That means we are going to sell 5980 strike and we will get a credit of 101 to sell this option. Now to protect our downside, we are going to buy a put option which is 10 points below the short put. So in this case I'm going to sell 5980 and buy 5970 put and I will have to pay 96.4 debit for it. To open this trade I will get a net credit of $470 where I can make max profit of $470 and the max loss is going to be $530.
Let's understand how and where we make profit. Now in this trade we will make profit if the market goes down and we can make profit even if the market stays flat. For me to make profit in this trade, the market does not even have to go up because I will make profit as long as the market stays over 5980, which is my short put strike. So in this case, even if market stays flat, I can still make close to 100% profit. If the market goes up, then I can capture a large chunk of that profit in just a few days.
Now let's go into the strategy. My trade outlook is one week and I enter the trade after a big sell-off when the RSI is oversold. RSI is a simple indicator called relative strength index. It indicates when market is overbought or oversold. So we are going to enter this trade whenever RSI is oversold because when the RSI is oversold, dip buyers start to step in and that is exactly where we want to time our entry. When we enter a trade like this, we just need a couple of green days to make profit. But we can make profit even if the market is sideways as long as it holds our entry level.
Let's go into the chart to understand how RSI works. So this is my trading view chart and I'm going to go to indicators and then search for RSI and it will show this indicator called relative strength index and I just select it. Now you will see the RSI indicator at the bottom of your screen. Whenever RSI is at or above the top line that is considered overbought it would be a value of 70. And whenever RSI is at or below this line this is considered oversold which is a value of 30. And whenever RSI is oversold usually after a big sell-off and at that point dip buyers start to step in and the market can start to recover. You can see here at this point RSI was oversold and this was a bottom of market and after this market started to recover and you can see other instances here the RSI was oversold at this point which is a short-term bottom here and after that market recovered over the next week and again you can see RSI oversold here which was a bottom and after that market had a significant recovery.
Now, this is a one-year chart. So, usually there are not a lot of opportunities. By default, the RSI indicator uses an upper band of 70 and a lower band of 30, which works very well. But there are a lot of instances where the RSI can go down to somewhere above 30, but they can still be great opportunities. So, for that reason, I will change this RSI lower band to 35. Now once I do that it will present much more buying opportunities for me which might be slightly lower confidence than 30 but they still work very very well for all these instances. You can see there was a significant recovery in the market after RSI went under 35.
Now let's go into the trade mechanics. We have a very simple rule for trade entry. We are going to open the trade in the morning whenever RSI is under 35. So the market opens in the morning. You see that RSI is under 35 that can be a good time for entry and we are going to sell at the money put credit spread. So for example if the current market price today is 5980 I am going to sell a 5980 put and I will buy a 5870 put which is 10 points below that at the money put is usually 50 delta. So I'm going to go 10 wide on it. I will get a credit of approximately $500 per contract to open this trade and my risk is also going to be approximately $500 and I will make profit as long as market stays above 5980. Now today RSI is not under 35. So I'm going to have to wait till that point to open this trade. But when that happens, I'm going to make this trade based on the price at that time. The delta for the sell side is going to be approximately 50 delta and the buy side is going to be just 10 points away with 14 days to expiry. For this trade, my profit target is 50%. And I do not use a stop-loss. Once I open this trade, I will immediately set a closing order at my 50% profit target. At that point, this trade is set and forget for me. My risk-to-reward is 2 is to1. So I am risking $500 for a profit target of approximately $250.
To execute these trades on Robin Hood or any other trading platform. I can go to Robin Hood and then go to Robin Hood legend and then I can search for the ticker which is S&P and down below I will see the options chain and in the options chain I can expand 14 day to expiry and then sell a 5980 put by clicking on this button and then 10 points above this I want to buy 5970 put and I'm going to click this green button for it and I can enter my quantity and if I'm selling 10 contracts The limit price is $4.7. And for this, my max profit is going to be $4,700. Max loss is going to be $5,300. And I can break even even if S&P drops by five points. So, there is a pretty good shot that I can make profit with this trade when I'm entering when RSI is under 35. For this trade, the collateral required would be about $10,000. But since I am getting $4,600 credit, my risk and capital investment is approximately $5,300. If you want to do a small trade, you can do as many contracts you want. You can start with one contract and then submit your order. So once your order is submitted, if the market is open, it should get executed pretty much immediately.
This is the back test result for this strategy for the last 5 years. I've been trading this strategy for the last couple of years and so far I've never had a losing trade because whenever a trade goes into a loss, I use my rolling and adjustment strategies to turn a losing trades into profit or break even. I will cover that in another video and you can find the link to that in the description below. For the last 5 years, this strategy had a 90% win rate. It made 54 total trades with 49 wins and just five losses. I typically like to trade this with 10 contracts, which cost me about $5,000. So, if you made all these trades using $5,000 per trade, the total profit would be $84,000. If you only traded one contract at a time, then the total profit would be $8,400. The profit factor for this strategy is 4.19, which is amazing. And the average win is 2,256 for 10 contracts. And the average loss is 5,280 with the largest win being $3,150. And the average duration for these trades is just 1 weeks. We open these trades with two weeks expiry. But most of the trades hit profit target within the first week itself. Because once we open this trade, all we need is a couple of green days and this trade is going to hit its profit target. And here you can see the performance chart with a very smooth ride with just a few small bumps even in 2022 when the market crashed by 28%. This strategy actually made a lot of profits and you can see the monthly performance on the right side over the last five years it only had two losing months and all the other months made big profits. So it is very consistent, very high win rate, super easy to execute and manage.
Just like any other trading strategy, this strategy also has certain risk. But there are a few ways to manage it. First of all, this is a defined risk strategy. That means that no matter what happens, a loss is capped to $500 to $550 per contract. Even if the market drops by another 10, 20, 50%, we will never lose more than $500 to $550 per contract. So size your position based on your risk profile. Only invest what you are willing to lose because the losing trades can go to zero. Even though this strategy has a very high win rate, it wins nine out of 10 trades. But if you lose one trade, that trade can go to zero. So you want to size appropriately so that even if you lose one of trades, it should not hurt your portfolio.
After a big sell-off, the RSI can stay under 35 for a few days until the market recovers. So in that scenario, if market goes further down, you can consider adding more positions based on your risk profile and account size. But the second put spread should be based on the new strike price based on the current price. There are also ruling and adjustment strategies to turn a losing trade into a winner or a break even. So, if I make these trades and it starts to go down significantly, I can make some adjustments to my trade to turn it around and make profit or at least save my loss. There are certain strategies that I can deploy for it. I'm going to cover that in another video and I'm going to share the link in the description below.
This strategy only makes 10 trades in a year. It can be great for someone who wants to be completely hands off and only make few trades in a year. But if you want a strategy that is more frequent, something that can generate a weekly options income and can make higher total profit with a high win rate and comes with ruling and adjustment strategies to turn losing trades into winners or break even. You can get it on my website and you can find the link in the description. If you have any questions about this strategy, post them in the comments and I will try to answer as many as I can.