(Options Selling) Glimpse trade: QQQ

11/14/2013

This trade is fairly simple. It is called a credit spread and it is being done on the Nasdaq 100 ETF. Symbol: QQQ

Sell to Open Dec 80 Puts (.38)

Buy to Open Dec 79 Puts (.28) for a credit of .10

If you do one contract of this trade the maximum you can make is $10 while your margin, also known as the maximum you can lose is $90. So your potential return is 11%.

As long as QQQ stays above 80 this trade will make money. Right now QQQ is trading at 83.76.

The trade has a 85% probability of working out and expires on 12/20 so 36 days from now.

Options Selling Plan

The plan is simple.

It the trade works, I will let it expire worthless. The options will go away and I do not need to exit the trade.

If the trade does not work out, I will exit when I am down 25%. To protect myself I will put in a limit order to exit if the debit to exit the trade ever gets to .23 cents.

Note: This trade is part of the Glimpse of Genius trading series. Glimpse of Genius is a free service where we share one delta neutral/option selling trade a month so that you can see how these trades work in real time. We do these “live” and you can sign up to be updated by email whenever we adjust or exit the options trade. To sign up for these email alerts Click Here.

This trade and all information on this site is for education and entertainment only. You should always seek professional advice before option investing your money in anything.

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8 Comments

  1. Lee Grey on November 14, 2013 at 5:07 pm

    Depending on your broker and your commissions, you’re going to give up about half or more of that $10 in trading costs. That’s either two or four commissions for each $10 spread.

    I’ve come to really appreciate options on RUT and SPX, because it saves a ton on trading costs.

    • Genius on November 14, 2013 at 5:45 pm

      You are right, this trade is commission intensive because it is only $1 in between strikes.
      If we spread it out to 2 point or 5 points between strikes it lowers the commissions.

      That being said you also need to have as low commissions as you can get.
      For example I get prices of .50 per option at one broker and $1 per option at another.
      So I can still do a trade like this and not give away everything in commissions.

      Not to say that I like doing $1 spreads. I don’t. In the OptionGenius portfolio I stick with RUT, SPX and other indices and stay away from the corresponding ETFs. One of the reasons is because of the commissions. I wrote about the other reasons in another post on this blog.

  2. alan on November 14, 2013 at 8:17 pm

    would the exit price on the buy side if your down 25% in the trade which you bought at .28 be .21 and not .23 as stated.

    ex. .28 x .75 = .21 ?????????????????????????????

    Thanks

    • Genius on November 15, 2013 at 3:28 pm

      I looked at -25% of my margin with is $90
      25% of 90 is 22.5
      It does not have to do with the buy side. But the total margin.

  3. Len Petry on November 15, 2013 at 12:03 am

    How do you determine that the trade has an 85% chance of success (i.e. the short put will expire)?

    • Genius on November 15, 2013 at 3:26 pm

      I used the thinkorswim broker software to do that calculation for me.

  4. Len Petry on November 15, 2013 at 7:46 pm

    I am guessing that Think or Swim is using Delta to assess the probability that the strike will finish in the money. Stated differently, Delta must have been -.15 when you opened the trade, which suggests that there was an 85% chance that the short $80 put would / will finish out of the money and expire.

    You don’t state the expiration, but I deduce that is December 13 (QQQ has several December expirations).

    However, I have learned recently that using Delta to assess probability is controversial. Some experts dismiss it as a reliable indicator of probability, insisting that its proper use (what it was designed for) is to measure how much the premium will change for every unit of change on the underlying asset, nothing more.

    So it would be useful to delve into how Think or Swim assesses probability. If Think or Swim is simply using Delta, then I’d suggest using put strikes with lower Deltas than .15 — to increase safety.

    • Genius on November 18, 2013 at 11:34 am

      First, you should never let the probability of profit percentage lull you into a false sense of security. The trade can still lose.
      Second, I dont know exactly how they calculate it. I am sure you can call them to ask. But I know they dont only use delta. It is a lot more complicated than that.

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