The other day I received a comment from a reader (Frank) asking about a SuperPut strategy using Long Calls rather than the stock. If you want, you can check out the comment and reply on my About page, but that question has nothing to do with what I am going to share with you now.
Comments from readers get my juices flowing and I love them for that. So I got to thinking, and I don’t know exactly how I got there, but it has to do with repeating the same trade over and over and over, on the weekly’s, week after week after week. I did have a strategy called the 10 am SPY Weekly and now I have the Weekly QQQ ATM Spread – and it’s easier than the 10 AM SPY because it seems you don’t have to use your brain! The rules are Iron Clad!
Before I go any further, I have not used this strategy in my live trading, but you can bet I plan to!
Initially I looked at trading a Put Debit Spread one strike out of the money. Normally, this is a bearish strategy since you would want the price of QQQ to be at or below the short strike price, but over a period of time it works out well in a consolidating or a bear market – and to some extent in a bull market. The reason? It has to do with the one truth about the market, and that is that price will go up and price will go down. So some weeks you win and some you lose. The secret is limiting risk.
The risk in each trade is the cost of the spread. Each trades comes out to a minimum 2:1 risk reward ratio, meaning your risk is half or less than the reward – very attractive in my mind. So you might have some weeks where you lose $60, but other weeks where you gain up to $120!
Look at the chart below of QQQ (click to enlarge). The time period covers the time that I back tested (3 different times) this strategy (from 6/2 to 9/2). You can see that there are up moves, down moves and some consolidation. (The vertical dotted line represents a weekend)
Price Chart of QQQ Covering Time Period of Back Testing
I used the thinkorswim thinkback capability to test this strategy the first two times. Each Thursday I selected the first Put strike OTM. I bought one lot. In the table below I didn’t include commissions, but my cost is 1.25 per option for a total of 2.50/trade. So for 13 weeks of trades, the cost is 32.50 – about a 10% hit on the results.
The first time I ran this I was shocked! I used my first idea of one strike Out of the Money (OTM) for the long option strike. The results are below. Note that the loses were relatively small and the gains much bigger than the loses. I let the spread expire without closing it each week. This simplifies the strategy and avoids any possible commissions costs for closing the trade, which would be an unnecessary expense.
Hey, an average of $100/month isn’t bad when you consider there was never more than $66 at risk at any one time. Just buying one more lot would double the profit amount.
I hunkered down into my Guru position and thought again. What would happen if I selected a long Put option ATM instead. This gave me a little more profit but also put a little more at risk. I had the same amount of winners vs losers too. The results are below.
The final test was using OnDemand to simulate live trading. I moved the time to about 15:30, hit the pause button and placed the trades using the ATM strategy each Thursday for 13 weeks. According to the Account Info to the right, my account (starting at $100,000) gained $585. Why the difference? I had one trade execute twice, otherwise it would be closer to the $416 result using thinkback.
It’s real and not Memorex. I will be using this in my live account starting this Thursday.
Happy Trading
◄Jeff ►
