How to harvest 60% success right direction on SPY?

Hi,

I have been programming an I have good 60%~75% rate on picking the direction of spy in a swing trade for 3~7 days. I want to use options to get more leverage and lower the risk. However if I go long I am worry of Volatility crush + time decay.I don't want to use credit spreads or credit strategies. I want to minimize the exposure by using bare puts or calls. Do you have any toughs on how to harvest that 60% move?

Thanks,
EG

 

Debit spreads and slightly otm calenders

 

@cdcaveman If i use debit spreads or calendars there is a limit on the upside and max profit

 

This is the price you pay to level out some of your Vega risk...you stated that was your desire

 

You could try a Butterfly

• Sell 2 weekly options with a strike at your target for SPY. (body)
  
• Buy 1 weekly option a couple of strikes above. (wing)
  
• Buy 1 weekly option a couple of strikes below. (wing)
  
• This will be a debit position to open.
• Calls or Puts.
• Maximum profit will be at expiry if the SPY hits your target price.
• Maximum loss if SPY ends up above or below the wings

 

@OTM-Options I have done butterfly and broken butterflys. My algorithm it is not exact on the target price. So that would be challenging

Thanks,
EG

 

This has been a common question... It's not simple to answer how to use a directional backtested strat using the underlying to leverage trading options... You would likely have to back test the application of the strategy with historical option prices...

 

Don't use options unless your model can predict the magnitude of the move.

 

Eric:
A few thoughts:
DTE: IFF your Duration is accurate, you may consider using something like 40 DTE options, such that you are out of your position prior to the acceleration of time-decay for the option. You may want a rule such as EXIT before 20 DTE remaining , which seems like a doable upper bound on your trade, should your target not occur in the time frame you expected).
Strike: Entering the long option trade with around a 70 Delta strike, should result in a leveraged position that behaves like holding the stock outright, since you are ITM a few strikes. Note that any portion of that option price that is extrinsic is subject to IV movement (so buying when IV, or the extrinsic price is high, should be carefully weighed, as it may evaporate quickly).
I used a similar technique for trend trading (I held the positions much longer), and if my memory serves me right, this resulted in me putting up about 6% of the capital that would have been required if I purchased the underlying outright. So is a leverage. Note: If your direction or timing is wrong, you stand to loose the entire investment, unless you have a reasonable loss management in place.
You may want to backtest this idea before using real money, since the 25%-40% failure rate of your trade may wipe you out (AKA: erase prior profits and more), since this is leveraged.

 

Stepandfetchit-

Time value = cost of gamma. Gamma is a squared term scaling linearly in time. That is, the gamma/theta ratio will be constant over the life of the option. This means the risks are the same for the 40 DTE option as a weekly, assuming both were traded at fair value. I'm referencing the first page of Ch. 10 in Dynamic Hedging here (pg. 167).