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Trading Weekly Put Credit Spreads

Want day trading returns without the headache of sitting in front of 26 big-ass monitors all day? You’re in luck because today we are going to discuss trading weekly put credit spreads on the SPY. The idea is pretty basic. I sell a put credit spread on the SPY that expires in 7 days or less. If the SPY does not drop to my short strike price I let the spread expire, keeping the credit. But before I get too detailed let’s make a detour to talk about why I started trading weekly put credit spreads—“weeklies” in hipster trader lingo—in the first place.

I like to day trade the SPY, but it has always bothered me that I could not backtest my strategy. I noticed that the difference between breaking even and being profitable was my personal experience and my judgement honed by keeping up with the market throughout the day. But this style of investing does not speak to me. I like probability-based trading. I like to know what my odds of success are if I put on the same trade throughout the year. And day trading the SPY does not fall into this bucket. So I started trading weeklies with the goal of returns similar to those obtained from my day trading activities. I have not given up on day trading the SPY— I am just less focused on the strategy.

How Does Trading Weeklies Differ From the Core Put Credit Spread Strategy?

My setup for weeklies is predefined. I open a credit spread on Friday or Monday and let it expire on the following Friday. I am seeking to have my short leg 2.5% away from the current SPY price with the goal of collecting 10 to 20 cents of credit for a 2-dollar-wide spread. If the SPY does not fall 2.5% within 7 days I collect the entire credit.

Clearly, this strategy has risk. Investors need to plan for occasionally getting whipped out. I combat big losses with disciplined money management—not compounding and keeping a set amount of funds in reserve. As you can see in my backtest (below) I started out with $5,000 but only traded with $4,000 and never increased my trade size. This strategy yielded a 40.78% CAGR return.

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But Will It Work in a Bear Market?

How trading weeklies will perform in a bear market is the big question. The ability to trade weekly options this way has only been around since 2011. What I do know is this: typically in a bear market volatility is higher, which means I will be able to put on trades that are further out of the money and with higher credits. I hope I can manage risk by putting on trades where the short strike is further from the current SPY price. I have been trading this strategy consistently for the past 5 months, and I plan to keep checking in from time to time to share my results.

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