Sell Put Spread Strategy on SPY To Generate Monthly Income
I was introduced into the world of Options Trading when I joined a Value Investing Course by a stock investing guru named Sean Seah. One was the strategies I learned from this course is called VIOS (Value Investing Option Strategy). This strategy aims to consistently make money by selling naked put options to collect premiums on fundamentally good stocks with minimal risk (worst case scenario you are forced to buy that stock if your option is exercised). Anyway I won't be talking too much about the Fundamentals of Options as you can find many free videos of these on YouTube and paid courses on Udemy.
I have been selling mostly naked put options to collect premium for 4 years using the ThinkOrSwim platform and I was collecting good premiums making some small profit. One strategy I used was to keep rolling my option if it went In-The-Money (ITM) on expiration day . However I discovered that there is a huge risk involved with this Naked Selling Option Strategy even when trading fundamentally strong stock. I was faced with some Hard Truths, that the stock market can be very volatile, unpredictable and it is possible to lose a lot of money.
During the US Stock market crash back in February/March of 2020, I sold a naked put option on Coke (ticker: KO) at $60 to collect a premium of USD30.00. Within a month, the price of KO went from $60 to $35, and my naked option was exercised since it was deep in-the-money (ITM), where I was forced to buy KO at $60 even though the price went all the way down to $35. So from earning a premium of USD30, I was looking at a loss of USD2500! I was not even able to roll my option any longer as well since it was too deep ITM. From that time onwards I have mostly changed from selling naked options to selling vertical put spread.
Recently I came across this Youtube video by projectoption which talks about selling vertical put spread on SPY to collect premiums. Here is the video:
This is a Sell Put Spread Strategy on SPY (SPDR S&P 500 ETF Trust) to collect premiums on a monthly basis. Here is a summary of the trading plan for this strategy :
Trade Entry Rule :
VIX Below 30. If VIX is above 30, do not trade that month.
Trade Entry Date:
Open on the first trading day of the month (for me it can be within the first 3 trading days of the month - depends on VIX)
Target Expiration :
Following month's standard monthly expiration (usually third Friday of the following month)
Target Expiration Examples:
Entry on the 1st Trading Day of January : February Monthly Expiration is Used (eg see below for the screenshot of the Option Chain as an example)
Target Expiration Option Chain :
Under PUT, SELL an option at Delta 30
Under PUT, BUY at Delta 16 (Strike Price is lower)
Profit Target : 75% (eg if you collect a premium of 1.51, then place a Limit Order at around 0.38)
Stop Loss : -150% (eg if you collect a premium of 1.51, then place a Stop Order's at around 3.78)
Trade Exit Rules :
Close your trade on the last trading day of the month (approximately 30 days of holding periods.) For instance, if my entry Date is Jan 2nd, 2020, then the last trading day of that month is Jan 31 2020. No matter what happens, I will close my January trade on Jan 31 2020 manually (if it is still open).
Make sure to watch the above video by projectoption as he shows the reasoning behind the rules, trade size and a detailed back testing result.
I did some back testing of my own (for the year 2020 only) using ThinkOrSwim OnDemand feature. I tried using both 150% and 100% Stop Loss. There were a few months that had huge drawdowns (particularly during the March 2020 Covid crash) but after 12 months, for both scenarios still ended up in profit.
Here is my the back test result with a Stop Loss set at 100% :
I have decided to follow this strategy and I currently have an option position which I opened on Jan 4th 2021. I plan update annually my progress with my result to check if this Strategy works over the long run.
Update : I have a guide on how to set OCO (Order-Cancels-Order) in ThinkOrSwim. Click here to check it out.
I posted an article about collecting premiums using the Sell Put Spread Strategy on SPY . Click here to learn more about that strategy. The Strategy will require me to create 2 separate orders after the entering the trade. The first Order is a Stop Limit Order to take profit (75%) and another order to Cut Loss (-150%). Profit Target : 75% Stop Loss : -150% One way to place the 2 orders above is to create an Advanced Order called OCO (One-Cancels-the-Other Order). So if any one of the 2 Orders gets triggered, it will Cancel the other Order. Here is a guide how to create an OCO order in ThinkOrSwim for the above Put Spread Strategy : After your order is filled, go ahead and create a normal Closing Order for your vertical spread You will see a Close Limit Order such as this. Click on Advanced Order Choose OCO With OCO picked, Right click on the first Stop Limit order → Create duplicate order . You will see the second Order here (a duplicate of the first order) ...
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