If you're anything like me you already have a consistent trading strategy figured out. You’re just placing the same trades repeatedly, trying to rack up as many occurrences throughout the year as you can. But the more you trade, the more commissions impact your performance—which is why eOption.com is one of my favorite brokers for trading credit spreads.
That’s because eOption.com is all about price—no frills, just trading at a very low cost.
I treat my trading and investing as a business, and like any prudent business manager I am constantly seeking to trim costs while growing revenue. With options trading the biggest costs are the commissions your broker charges for every trade. So in the interest of taming those fees I built a tool to help you find the cheapest broker for particular options trading strategies: say hello to Broker Finder. I routinely review and compare the broker commissions I pay, and I have realized that no one broker is the cheapest for every transaction.
When I got interested in trading credit spreads, like most I harbored some skepticism. A credit spread trade seemed to be the type that works—until rather dramatically it does not. Then I set off to figure out the correct way to trade SPY put credit spreads. The path was familiar: backtesting.
When I talk to people about my credit spread trading strategy I often hear the claim that credit spread trading works great for 5, 10, or 20 thousand dollars, but the strategy can’t be scaled up. Are these skeptics suggesting a lack of liquidity to fill bigger orders?
Here we explore the put credit spread trades I placed on the SPY durning the month of January 2015. This is my primary trading strategy for monthly income. By trading put credit spreads on the SPY I am typically in a trade for 23 days but no more than 45 days.
To study how delta affects an opening trade I did—of course—some backtesting. I took a $10,000 account and placed put credit spread trades from 2011 to current. I opened up spreads that were $2 wide, at least 4% out of the money, and no more than 45 days to expiration.
Almost all of my credit spread trading is focused on the S&P 500 via the SPY or S&P 500 futures. Why am I hyperfocused on the SPY? So I can sleep at night (well, try to sleep—I do have a young son and a daughter on the way).
Every great trader has a bag of tricks. Each of these opportunities, if you will, is a predefined market condition signaling when to enter a trade and when to close it. One that has been in my bag for awhile is buying the SPY when the Relative Strength Index (RSI) indicator hits 30.
Like most traders I got started as a stock picker following the most basic of rules: do your homework and have a diversified portfolio. This credo is sound, and it’s the approach I use for some of my accounts. The key to this more traditional approach is understanding that your emotions do play a factor in your investing decisions—and that learning how to manage your emotions can be the pivot between success and failure.
The day I learned to pay attention to volatility was the day I started to be consistently profitable in options trading. Most options traders start out trading stocks and they learn that if a stock is associated with good news its value often increases, whereas bad news sends a stock down.
