Over the past couple years on this blog I’ve shown countless option strategies and chart setups with the goal of educating traders on ways to reduce risk in trading. Still, there are many, actually I’d say most, traders who are confused and suffering from information overload and I may be guilty of adding to that. Now I’m going to narrow it down to a very simple, very specific strategy to convert a small price move to a potentially very large profit. The only ‘indicators’ that are needed to understand the trade I made are the three that I always use on all timeframes! (1) The 8 SMA bands (2) The previous period’s high, low and HB (midpoint) and (3) Fibonacci retracements. Hopefully you’ll notice the lack of indicators such a RSI, MACD, Stochastics, etc. I don’t need them to analyze a price chart. Neither do you. Let’s keep this simple!
Below is a SPX 5-minute chart. I typically prefer to trade timeframes longer than 5-minutes but because price opened above the previous day’s high I wanted to see if it got rejected because previous period’s high is typically good location for selling or shorting. Successful trading is all about strong opinion’s, lightly held! I started Friday with a bearish bias because price should have dropped back below Thursday’s high and targeted at least Thursday’s HB. But, as I’ve said many times before, when what should happen doesn’t, the opposite is likely! So, while a bearish bias was justified at Friday’s open, that bias began to change to bullish almost immediately after the open. Look at the comments on the chart and we’ll continue the discussion below.
Strong opinion’s (bias), lightly held! Any bearish bias prior to the market open was clearly incorrect after about 10-15 minutes of trading! If, just before the market opened on Friday morning, I had tweeted that Thursday’s high was good location to sell/short I would have been right…for about 5-10 minutes and then price would’ve started to prove that thesis wrong. I could’ve spent the rest of the day defending why my short position was correct while getting punished by the market for not adapting to the actual price action. This tweet say’s it all! 👇
If you have a strong ego in trading, you are going to fail. I’m not going to even try to qualify that statement. I’ve been trading a long time and have seen many traders come and go and those with a strong ego, when it comes to trading bias, are all gone! Those that are around now will be gone soon enough. The market humbles even the best traders, especially when they start to believe their own bullshit! Check your ego at the door when you enter the trading room!
Back to the chart. Same chart as above but I’ve added a #1 and #2 to two of the 5-minute candles. #1 is where I entered a long trade by buying OTM (out of the money) Calls with 10DTE (days to expiration) and #2 is where I sold Calls with the same strike as the Calls I just bought at #1 but with 7DTE. For the same price. BTW, I would’ve stopped out of that long Call trade if price had dropped below the 4918 low of the candle proceeding #1. Why? If my basis for buying Calls at #1 was that the preceding candle was a bullish reversal and the rising lower band of the 8SMA indicates a rising trend then price not respecting that price level as support would be an indication that the bulls weren’t strong. No reason to be long Calls if the bulls are weak!
What do I mean ‘the same price’? I paid $9 for the SPX 5000 Feb12 Calls that I bought at 10:39 AM and I received $9 for the SPX 5000 Feb9 Calls that I sold at 10:44 AM. The same price.
The net effect was that I owned the SPX 5000 Call Calendar spread with Feb9/12 expiry for $0.00. I actually repeated that trade using a similar strategy of buying a Call Diagonal spread and then rolling up the long strike by selling a Vertical Credit spread for the same or a higher price. Below shows the fills and the risk profile for both strategies, one, buying a Call and then selling a shorter duration Call to turn it into a zero cost Calendar spread and, two, buying a Diagonal spread and turning it into a $.50 minimum profit Calendar.
Below is the combined risk profile of both positions.
So with just 2 positions established during a total of less than 2 hours of trading on a Friday morning, I have a position which can return a large profit by the next Friday. I could take the week off from trading, maybe go on vacation, and let those 2 hours of ‘work’ potentially pay for it!
So here’s the bottom line; you don’t have to grind out hours of trading to be profitable. Your time should be spent in preparation of trading by identifying key levels and establishing an ‘if this happens then this is that trade I’ll make and this is my stop‘ before the trading day begins! You also don’t need lots of indicators and lines on your charts. You don’t need to pay attention to macro economic trends or listen to trading ‘experts’ and you certainly don’t need to pay for a trading service. You can learn to do it all by yourself if you just learn to keep it simple!
Questions or comments? Leave them down below 👇 or you can find me on Twitter (X) @VegaOptions
What would you do if as soon as you entered the first long call for $9 the market reverses and drops below the ‘bullish reversal’ candle?
From the post: “BTW, I would’ve stopped out of that long Call trade if price had dropped below the 4918 low of the candle proceeding #1.”
When do u close out the Feb9/12 call calendar? On Feb 9?
That can depend on if I’m using those Calendars as a hedge to some other positions but, in general, I do keep those until the Friday expiry.