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Tagging this as Discussion becuz it’s no way well-researched enough to even come close to a DD.
My thesis? Line goes up. But sometimes goes down. And sometimes stays flat.
Three goddamn scenarios, so how to work with all three of them?
Might I humbly suggest to you: the credit call ratio spread.
It’s simple enough, sell a slightly otm call, buy double the amount in even more otm calls. Net credit upfront. Valley of death between the short and long strike and after the long strike for the difference in strikes (but we don’t talk about that… fine I’ll talk about it later) and unlimited gains after that. Seriously, I cannot state how much I love the idea of this play. Is it capital intensive? Yes.
With my standards for strike selection, I generally risk 500 bucks for a net 40 buck credit upfront. So extrapolating from that, my strikes are usually $5 apart.
The methodology:
Let’s get knee deep into the exact how-to’s.
Underlying: SPY or QQQ (I prefer SPY)
Strike selection: short strike: 0.27% otm long strike 0.89% otm. Doesn’t have to be exact, but approximately.
DTE: 7days so weeklies, always on a Friday entry.
“What, you say? Friday? What about weekend theta decay???”
Well, we want that. We started with a net credit and more often than not we’ll buy back for a debit. The weekends eat into the premium, and we’re already primed to close.
Profit target: 50%. Seemed reasonable to me, but your risk tolerance could vary.
Stop loss: None.
“No stop losses??? That sounds risky…”
Yes, it is. But here’s my thinking. The valley of death will get tested one way or another. If we have a stop loss, chances are it’ll trigger before we even see meaningful movement. (At least that’s what I’m led to believe based on my trading platforms’s charts for theoretical values before expiry. The valley of death is always slightly behind the short strike, and it moves up and deepens until expiry. This would be the Greeks in action, but honestly I don’t really care about the Greeks. I feel strike selection and timing is more important.
PoP is usually mid 70’s with SPY fyi. The gains on the downside isn’t spectacular, but when it goes up, you bet I’ll close this for a credit.
“Then why not just buy a call if the upside is what you’re after?”
Are you not paying attention?? I said in the beginning: line go up, it go down, it stay flat. Calls only make money if it goes up (assuming you buy them). You gain nothing from downward or sideways movements.
“Then buy puts just in case? Or both (straddle/strangle)?”
Bruh if I had the money to buy a straddle or strangle on SPY I’d be posting on the og sub not this one. And puts have the same issue, it’s only profitable in one scenario.
“Okay then, what will you do if it hits the max loss?”
1. Try not to cry.
2. Cry.
3. Repeat strategy for next week. Surely can’t be a bust twice right…..?
So far I’m Week 3 into this strat, and slowly branching out to QQQ as well.
First week: https://imgur.com/a/QSRLm6g
SPY shot up iirc, so realized the upside
2nd week: https://imgur.com/a/X6NS5dV
SPY was flat or something I don’t remember.
3rd week: https://imgur.com/a/qTBJf1u
SPY cratered.
4th week (ongoing): https://imgur.com/a/c7GlYsg
Who knows what SPY and QQQ will do this week? We shall see.
“What’s your endgame?”
I think a conservative 30% gain YTD this year is not unreasonable. I’m not looking for 100+% gains. Just enough for me to feel content. @mods do let me know if I should do updates (which I plan weekly) on this same post or separate posts.