Directional Credit Spread Strategy For ThinkOrSwim

[agorena123]

@agorena123 Betting against GameStop? It got rejected at 3SD?

WOW! looks like some penny stock action there lol. Did you do anything with that move?

I did SQ 205/200 put credit spread when it went below 2 STD yesterday and went ahead and took profit when it hit about 50% of profit potential on bounce after the sell off.

 

[Earthian]

Haha, nope. Since it was a penny stock I didn't make a move. But my hand was itching to buy a put option at 90$ just looking at the screen

 

[agorena123]

Haha, nope. Since it was a penny stock I didn't make a move. But my hand was itching to buy a put option at 90$ just looking at the screen

GME options bid/ask spreads are crazy wide!

 

[Earthian]

Yeah, looks like the short term liquidity and volatility is making an impact

 

[Earthian]

So, I traded a couple of long call contracts of IBM at 118$ and exited at 122$. IBM gapped down after earnings, BTD showed oversold, and also was holding a monthly support level. Nice little trade testing this simple setup @agorena123 Not sure if you looked at GME. It shot back up to 150$. Do you think we could filter out these kind of momentum stocks from the radar?

 

[agorena123]

So, I traded a couple of long call contracts of IBM at 118$ and exited at 122$. IBM gapped down after earnings, BTD showed oversold, and also was holding a monthly support level. Nice little trade testing this simple setup @agorena123 Not sure if you looked at GME. It shot back up to 150$. Do you think we could filter out these kind of momentum stocks from the radar?

GME today - but wait, there's more!

Good question. I primarily trade my watchlist listed earlier which typically provides a few trading ideas a week. The stocks/options from the watchlist have plenty of liquidity and narrow spreads.

 

[Earthian]

GME today - but wait, there's more!

Good question. I primarily trade my watchlist listed earlier which typically provides a few trading ideas a week. The stocks/options from the watchlist have plenty of liquidity and narrow spreads.

Haha, GME is going insane. I was just going through the scan results one by one last night. On a high level, it looks like whenever the 2SD level is breached for the first time within the last 20 days they workout better. Also, non-trending stocks seem to work better than trending stocks or high momentum stocks on both sides of SD.

 

[yingchal]

@agorena123 do you usually set up the spread on Tuesday? I did mine on SQ on Monday, 206/207, which well gives me a little hard time now. But I feel this week is exceptional.

 

[agorena123]

@agorena123 do you usually set up the spread on Tuesday? I did mine on SQ on Monday, 206/207, which well gives me a little hard time now. But I feel this week is exceptional.

I now primarily use price breaking above/below 2STD as the trigger on Monday through Wednesday mostly, (edited to add) Thursday on some occasions if the profit potential to capital required is around the 10% area.

The scans I have alerts to 1.5 STD high and low, and I've learned to wait and see if price is going higher/lower that day which it often does. In past trades I could have gotten the same premium at wider distance.

I did do a bullish SQ put credit spread on Monday as well during the sell off as I mentioned in post #47 and closed it when it hit 50% of profit potential that same day.

 

[agorena123]

@agorena123 do you usually set up the spread on Tuesday? I did mine on SQ on Monday, 206/207, which well gives me a little hard time now. But I feel this week is exceptional.

I hope today's move helped

 

[yingchal]

Thank you @agorena123, I ended up 50% profits today.

2STD is definitely a good move, but I am also thinking about making this strategy more resilient.
What if we always play two positions per week, 1 bullish 1 bearish, and they become to the same sector.

So ideal scenario is each move in our favor.
For a market-wide move like this week, we will have 1 position that for sure hedges the loss.

 

[agorena123]

Thank you @agorena123, I ended up 50% profits today.

2STD is definitely a good move, but I am also thinking about making this strategy more resilient.
What if we always play two positions per week, 1 bullish 1 bearish, and they become to the same sector.

So ideal scenario is each move in our favor.
For a market-wide move like this week, we will have 1 position that for sure hedges the loss.

I let the price action in my watchlist and the 2STD to determine what positions to play. This week for instance I did the SQ put credit spread, and FB and MSFT call credit spreads - 1 put credit spread and 2 call credit spreads.

The downside to the strategy is the potential loss, which is defined, but can still be large compared to the profit potential.

TheoTrade had a good video on youtube yesterday about reversion to the mean, which basically what this strategy is. But, as you saw first hand, the move isn't always over once it triggers.

My experience so far has been that I'm generally in a good price level to put the odds in my favor for a "reversion to the mean" move, but there is some trade management I'm still figuring out and welcome all comments. But the strategy does work as YTD my account is up 28%. (edit 33% after closing MSFT early today)

 

[CoolMoeBee]

@agorena123
Thanks for sharing your timeframe. I have been studying upon this approach for the past several months and built a scanner. Just had problems nailing down the timeframe. How far out on expirations are you going for your strategy?

 

[yingchal]

@agorena123 what is your normal reward/risk ratio? This strategy seems very bad for the ratio itself.

 

[CoolMoeBee]

@agorena123 what is your normal reward/risk ratio? This strategy seems very bad for the ratio itself.

@yingchal High probability credit spreads always have a risk/reward ratio like that. That's why you pull them off at 25-50% profit.

 

[agorena123]

@agorena123
Thanks for sharing your timeframe. I have been studying upon this approach for the past several months and built a scanner. Just had problems nailing down the timeframe. How far out on expirations are you going for your strategy?

@CoolMoeBee I usually use same week expiration and on occasion have gone with next week.

 

[agorena123]

@agorena123 what is your normal reward/risk ratio? This strategy seems very bad for the ratio itself.

@yingchal all credit spreads have a similar risk/reward profile yet collecting premium is a strategy that has been around forever and most often are simply based on deltas and OTM probability.

 

[agorena123]

Search for Steve Lentz Optionvue on youtube. He has some videos with similar approach but not STD on daily charts and the monthies.

 

[yingchal]

Thank you @agorena123.
Did you find out any good candidates this week? It seems to recover but none breaks the lines.

 

[agorena123]

Thank you @agorena123.
Did you find out any good candidates this week? It seems to recover but none breaks the lines.

@yingchal there were some candidates from last week that broke the lower bands on my watchlist that were still candidates, the index ETFs and TSLA, but I did not do the put credit spread. Looking like they would have worked out, but Friday would have been better for positions and I don't like holding over the weekend.