Why Day Trading SPY Options Works So Well

Let me explain something.

It was Thursday, May 22, the day after SPY tanked on recent news. Moody’s Ratings dropped the U.S. government’s score by a notch from the pristine AAA to AA1, citing rising debt and interest costs. Moody’s comments that the situational costs are “significantly higher than similarly rated sovereigns.” This isn’t terrible but it did slip from the best. The United States is on par with Austria, Finland, New Zealand and Taiwan, but under the triple-A rated countries of Australia, Canada, Denmark, Germany, Liechtenstein, Luxembourg, the Netherlands, Switzerland, Norway and Sweden. What that means is that it will cost more for the government to borrow money and that will filter through to you and me. Combined with the fact that the U.S. House narrowly passed a tax and spending bill that will add roughly $3 trillion to the national debt in the coming decade proved too much for the bond market, upping yields and resulting in the drop in the S&P 500 as money flowed out of equities.

SPY, the resilient stock that it is, dropped to $580 in premarket, wiping out the last week or so’s gains. Fair enough. But through a series of interesting chart patterns and support and resistance levels early in the day, Jon and I determined high probability trades were setting up to the north. Despite this unsettled situation, volatility was reasonable, and we saw opportunities with calls, including further out contracts in both time and strike price. We generally prefer ‘at the money’ options, but when we expect major moves, there can be huge percentage gains on cheaper, ‘out of the money’ contracts. It really depends much on your confidence in the market, but Jon and I have seen this all too many times. Our aim is to trade where the market is going, not where it is now.

Hence, when the price of SPY was hovering around $582 shortly after the opening bell, we loaded up on way ‘out of the money’ $605 calls for the following Friday, May 30, costing a mere $0.34. The idea was to hold onto them for a substantial gain, but later in the day, I decided it would be better to simply take profits at $0.41 as we were coming up on a long weekend. I did not want to incur a possible three days of theta loss at about eight cents a day, even though I was confident this option may move significantly higher. Incidentally, those calls did ramp up to $0.47 during the day. We still netted out with a gain of 20.5%, and with a lot of contracts, it proved to be a very positive trade.

To the uninitiated, they would have thought it was a flat day as SPY closed within $0.37 of its open.

You see, we live in volatile times. Markets, while usually predicated by economic reports, are governed more by what flows out of the current Administration. It can be challenging to anticipate President Trump’s next whim, be it geopolitical engagement, budgetary comments or the reshaping of world economies through his infamous on-again, off-again tariffs.

That is the beauty of what we do. It matters not which way SPY is moving, as long as it moves, and move it does every day. We take advantage of mid-day movements, preferably the morning fluctuations, trading both directions for short-term gains.

Small daily gains can add up. The path in this crazy environment to long-term growth is small incremental steps. We discuss these and other timely topics in the Trading Room.

Join us, mornings 9:20 to 10:30 a.m., ET.  Jon and I have experienced many years of intense market volatility. We can help you navigate around the icebergs.

Alternately, let us pick the trades for you with our ever-popular DTS Signal. This service sends your cell phone a text message when our algo sets up a high probability trade. Buy it immediately, establish your sell order and collect your rewards.

Our Pick of the Day emails you a specific option for purchase at market open. Both the DTS Signal and Pick of the Day enjoy an outstanding, near 90% success rate.

Our mainstay Inner Circle lets us do the heavy lifting, with our Morning Market Assessment, daily follow-up report, and Wednesday night meetups.

Still undecided? Log onto our Week in Review, 8 p.m., ET, Sunday night. The next session will be on June 1. Register now!

See you then!

Great trading,

Hugh