agorena123
Member
Hi all, long time lurker here and wanted to share my directional credit spread strategy that I've been using for the last several weeks with great success. The strategy is out there on youtube by a couple of option trading experts based on daily charts and 20-ish day option expirations. I've modified the strategy to use weekly options based on swing high/lows on an hourly chart and use a different indicator than what is proposed on the strategy videos.
The basics of the strategy go like this. You are looking for stocks on an hourly chart basis, regular trading hours, that have moved in the 1.5 - 2 standard deviations price range using the StandardDevChannel indicator in TOS. You are then "challenging" the stock to move to the 3 standard deviation range and sell that week's expiration credit spread call or put credit spread depending on whether the stock is hitting the higher or lower ranges. In my last few weeks of trading, no stock has moved to the 3rd standard deviation price range. You will find that most options are in the 80%-ish range for OTM probability and trading the extremes of the range give you an added advantage in your odds.
For example, this week AMZN and FB hit the upper 1.5-2 Std dev price range and SQ hit the lower range but did not trade SQ. The 3rd standard dev line at the time for AMZN was at the $3400 level so I sold the $3400/$3410 call spread. For FB the 3rd Std Dev range was in the $290 range but gave myself a little extra room and sold the $300/$305 call spread. Both will expire worthless today, but sold them yesterday as I had things to do today. On previous trades, I close out the short position at less than 5 cents (no commission on TOS for less than 5 cents) just to make sure there is no assignment risk and let the long expire worthless.
The chart and scan set up is easy. For the chart, I use the standard 1 hour 20 day time frame, regular trading hours. I add three StandardDevChannels - 1.5, 2, and 3. I remove the midlines but that is just personal preference. For the scan, I use the StandardDevChannel study looking for stocks price close above and below (two scans) 1.5 standard deviations on 1H chart using 140 bars to match the hourly chart - 7 bars per day * 20 days - and set up the scans as watchlists.
Final comments:
1. Placing trades based on this strategy is not based on precise timing but rather selecting a price range where the odds are the directional move is exhausted and will not continue. It does however sometimes continue in the very short term and I have seen losses for the day in my positions. The bet is that by expiration later in the week the stock will be lower than the strike price of short position and every single one of my trades in the past month has worked out.
2. The StandardDevChannel indicator repaints, or more accurately form fits itself to the data on the chart - as the data changes the lines will contract or expand. So I don't give much attention to the left side of the chart, only what is happening now. I have found the 20 day hourly chart to be "slow" enough to give good data points to make trading decisions at the most recent hourly bars and the 3rd deviation line a good target of where to sell the spread.
3. There are strategies to manage the position if it goes against you, but that is a lengthy topic in itself and I can honestly say I'm no expert. My simple approach is close the entire position or close the short and let the long run. So far I have not had to do either on any position.
4. I have a day job that give me the flexibility to monitor my trading activity, but cannot fully devote my complete attention to trading. I have begun to "trust" the system in its basic form as it has been profitable - 6-8% weekly returns without a loss yet, knock on wood lol. This approach has been the most consistent and profitable trading style for me and expect to only do this moving forward.
5. Lastly, I look to put positions on Monday and Tuesday. I don't like trading over the weekend on the weeklies but have taken a couple of trades that showed up late in the week for next weeks expiration and they worked out fine. There are many nuances to options so the strategy can probably be refined and I would welcome comments and feedback.
Happy new year all! Here's to a prosperous 2021!
The basics of the strategy go like this. You are looking for stocks on an hourly chart basis, regular trading hours, that have moved in the 1.5 - 2 standard deviations price range using the StandardDevChannel indicator in TOS. You are then "challenging" the stock to move to the 3 standard deviation range and sell that week's expiration credit spread call or put credit spread depending on whether the stock is hitting the higher or lower ranges. In my last few weeks of trading, no stock has moved to the 3rd standard deviation price range. You will find that most options are in the 80%-ish range for OTM probability and trading the extremes of the range give you an added advantage in your odds.
For example, this week AMZN and FB hit the upper 1.5-2 Std dev price range and SQ hit the lower range but did not trade SQ. The 3rd standard dev line at the time for AMZN was at the $3400 level so I sold the $3400/$3410 call spread. For FB the 3rd Std Dev range was in the $290 range but gave myself a little extra room and sold the $300/$305 call spread. Both will expire worthless today, but sold them yesterday as I had things to do today. On previous trades, I close out the short position at less than 5 cents (no commission on TOS for less than 5 cents) just to make sure there is no assignment risk and let the long expire worthless.
The chart and scan set up is easy. For the chart, I use the standard 1 hour 20 day time frame, regular trading hours. I add three StandardDevChannels - 1.5, 2, and 3. I remove the midlines but that is just personal preference. For the scan, I use the StandardDevChannel study looking for stocks price close above and below (two scans) 1.5 standard deviations on 1H chart using 140 bars to match the hourly chart - 7 bars per day * 20 days - and set up the scans as watchlists.
Final comments:
1. Placing trades based on this strategy is not based on precise timing but rather selecting a price range where the odds are the directional move is exhausted and will not continue. It does however sometimes continue in the very short term and I have seen losses for the day in my positions. The bet is that by expiration later in the week the stock will be lower than the strike price of short position and every single one of my trades in the past month has worked out.
2. The StandardDevChannel indicator repaints, or more accurately form fits itself to the data on the chart - as the data changes the lines will contract or expand. So I don't give much attention to the left side of the chart, only what is happening now. I have found the 20 day hourly chart to be "slow" enough to give good data points to make trading decisions at the most recent hourly bars and the 3rd deviation line a good target of where to sell the spread.
3. There are strategies to manage the position if it goes against you, but that is a lengthy topic in itself and I can honestly say I'm no expert. My simple approach is close the entire position or close the short and let the long run. So far I have not had to do either on any position.
4. I have a day job that give me the flexibility to monitor my trading activity, but cannot fully devote my complete attention to trading. I have begun to "trust" the system in its basic form as it has been profitable - 6-8% weekly returns without a loss yet, knock on wood lol. This approach has been the most consistent and profitable trading style for me and expect to only do this moving forward.
5. Lastly, I look to put positions on Monday and Tuesday. I don't like trading over the weekend on the weeklies but have taken a couple of trades that showed up late in the week for next weeks expiration and they worked out fine. There are many nuances to options so the strategy can probably be refined and I would welcome comments and feedback.
Happy new year all! Here's to a prosperous 2021!