if you're an options beginner with no experience this video will teach you one of the simplest high probability strategies that there are I'm Seth freudberg and we're one of the top proprietary trading firms in the world with numerous seven and even eight figure per year Traders you found the right place to learn as you might know options trading has become really popular but some Traders find options a little confusing and I'm often asked to share with people what I consider to be the simplest option strategy to learn and implement and the great part is that
this strategy has a buildin very high win rate and if you stick around you'll understand exactly why that win rate is so high and you'll also learn how easy it is to implement this strategy now before we get into this option strategy that we'll be teaching you in today's video if you're absolutely brand new to options trading and you don't know much about how options work we've put together a video for you to understand options Basics and if you click the video appearing on your screen right now it will lay the groundwork for you to
understand the option strategy that we'll be sharing with you in this video Then when you're finished you can come back and watch the rest of this video lots of people have heard of stock options such as calls or puts on stocks that you're interested in trading but some Traders may not realize that you can trade options on the indexes themselves such as the S&P 500 or the NASDAQ 100 and in fact the S&P 500 is traded under the symbol of SPX and so let's take a look at a chart of the SPX index up through
the last Friday in September of this year and as you can see it's been a very bullish year for the SPX through the end of the third quarter up nearly a th000 points since the first of the year closing at 57387 that day and suppose right around the closing bell we pulled up an options chain expiring one week later on the first Friday in October which was October 4th and we go ahead and we look at that column called Deltas on the put side of the options chain and we find the option that is as
close as possible to the 10 Delta put which in this case is the 5565 put 173 points below where the index is trading and we sell five of those puts for price of $6 and then for protection we'll buy five puts two strikes down which is the 5555 put and we'll pay out 530 for that when an option Trader does that selling a put higher up on an options chain and buying a put lower down on that same options chain then that Trader just executed what Traders referred to as a put credit spread now before
we go any further you might be wondering why we picked those 10 Delta put options to sell and that's very important so we're going to take a minute on this before we go on you see the Delta of an option is a mathematically arrived at prediction of how much options price is likely to move based upon how much the index itself moves and while it's a bit of a complicated topic suffice it to say that an options Delta has also been found to be highly correlated to the probability that an option will expire with value
on the day it expires and so for instance a 10 Delta put option has approximately a 10% chance statistically of expiring with value which means and this is really important that it has a approximately a 90% chance of expiring with no value and so when we sell a 10 Delta put at 5565 like we did here then that has only a 10% chance of expiring with any value on expiration day which means that the index itself only has a 10% chance of expiring below 5565 so so far below where it's trading on the day the
trade was initiated and therefore it has a 90% chance of expiring above 5565 so keep that in mind as we go through this example because you're going to realize its significance in just a minute okay so let's first analyze the cash flow implications of executing this trade and we'll start with those five puts up at 5565 and as you can see we were paid a price of $6 for those and each index put option pays off at $100 per point if the index closes below its strike price so you multiply that by 100 and you
sold five of them so as you can see from the calculation that part of the trade yields positive cash flow in the amount of $33,000 however remember we bought those puts at$ 55.55 for protection so we pay out most of the premium we received for that protection resulting in a net positive cash flow of $350 for this trade for which your broker will require you to have 4650 in your account at a minimum which is the trades worst case scenario we've got that $350 in extra cash in our account and so we'll move to the
day that this trade expires on October 4th and as you can see the index hardly moved that week closing up slightly at 57 51.0 7 and so where does that leave our put credit spread trade now that the options have expired well starting out acknowledging that we've already received the $350 at the beginning of the trade if we take a look at the five put options we sold at 5565 those 10 Delta options well those started out more than 170 points below where the index was trading and now they're even further below the index price
more than 186 points below its closing price that day and so since put options only have value if the index were to close below that put strike price then that put option simply expires worthless as do the protective puts at 5555 which are even further from the market and so both options simply expire worthless and we just pocket that $350 as our profit in other words our original cash flow becomes our profit if the options expire out of the money on the day that they expire okay so now that trade is closed so let's do
exactly the same thing for the next Friday in October which is October 11th and with the Index closing at 57 5107 that day this time the 10 Delta option was down at 5570 and the protective put is located 10 points below again at 5560 and as you can see from the calculation we again receive exactly $350 for this trade when you net it all together and so if we now move to the day that the trade expires on October 11th you can see that the index has pushed up again this time closing at 5815 03
a rally of 65 points from the day we enter the trade so if we look at the results of our trade we again get to pocket that full $350 premium because the index closed again really far above the strike prices of both puts so we'll start the next trade immediately this time selling the 56701 Delta puts and buying the 5660 protective puts and this time we collect a little bit less $275 in this case and we'll need a little bit more capital for this trade specifically 4725 and if we move to the expiration of this
third trade you'll again see that the index rallied and when examining the results of our trade with the Index closing close to 200 points above both puts strike prices they also both expire worthless resulting in another win of $275 now our next trade for October 25th is located even higher up the options chain because the index keeps rallying and this time we sell the 5745 puts at 10 Delta and buy the 5735 protective puts collecting $300 as you can see from the calculation and by expiration the index had actually sold off mildly after we entered
the trade closing at 5882 which is still despite the selloff well above where the options are located down at 5745 and 5735 and so again we end up pocketing the entire $300 even though this time the index had actually sold off mildly and when we consider that there was only a 10% uh chance of losing this trade anyway because the tend Delta puts are so far below where the index is trading that even if the index goes down we still have a full win and now I think you're starting to understand why in Practical terms
this trade has such a high win rate the short puts are just located so far down below the market that even selloff cost of a mild variety don't affect us and let's finish up the month of October and then we'll wrap this up and so to do that we actually have to enter final trade that expires on November 1st and as you can see this time we sold the 5620 puts and we bought the 5610 puts resulting in cash flow of $350 and again this final week the index sold off mildly but the puts are
located more than 100 points below the close of 57288 resulting again in a full win of $350 and so if you take a look at all of the October trades you can see that we actually in this case had a 100% win rate made a total profit of 1625 which produces a return of 34.3% against the peak Capital used during the trade which was that one trade where we needed 4725 to execute the trade and so what I'd like you to take away from today's video is that put credit spreads on indexes can be very
rewarding and very high probability if you locate the trades at 10 Deltas as we did in this case now one thing I'd like to point out is that this strategy will work very well in flat or bullish markets but in a bearish market it may struggle and so what some Traders like to do is to apply an indicator of some sort and then only trade the strategy when the indicator is predicting a bullish period of time such as when an index is trading above its 50-day moving average or the RSI for that index is at
or near 30 but those are only a few examples of how you could refine this basic trade to minimize the chances that this trade ends up in a loss which of course even statistically is going to happen 10% of the time approximately professional options Traders understand the relationship between an options Delta and the chances of a trade being successful and now you've got some knowledge of that yourself and can carefully apply it in your trading once you get a larger grasp on the best practices in options trading now if you'd like to learn three more
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