Unsure where to have put this since this is just how I’ve played SPY.
I felt a little encouraged by my recent wins with SPY both on the bearish side and bullish side that I wanted to give a very brief method to how I play this ETF. Admittedly I don’t put too much thought in how I play SPY, though here is a few key things you should be aware of before getting into a position.
Sentiment: Market’s outlook. This being my and presumably a lot of other’s golden rule to playing SPY and for many others. One day can look super bullish, though the very next you could see a flash-crash and watch as your options hit rock bottom.
News: Coincides with the sentiment within the Market. Obviously things such as lockdowns, bombings, and other crises can see Indexes drop ridiculously.
Technical Analysis: Although an important tool to have, SPY can and has diverted off paths predicted by TA due to the golden rule (sentiment). Some people can say that a ‘double bottom’ on SPY will bring large upward movement, it’s not completely guaranteed. Super important, but overreliance can lead you to losing money.
The Method
My method the past few months has been playing SPY as safe as possible as to minimize loss on a bad entry. This method in how I do this is simple.
- Watch for a correction/downtrend on the daily chart. (For 2021, it has been happening in the middle of each month, typically due to FOMC/Minutes being posted.)
- Wait for the trend to reverse.
- Enter in with Monthly expirations at least 30 days out and within strikes that are ITM or 5 strikes OTM (you can enter in at higher strikes, but you’ll be risking more greeks effecting you.
- Hold either until profit is satisfactory or if price action hints at a bearish movement. Stop loss highly recommended.
My Rant
Essentially ‘buying the dip’ of SPY into long calls. The point of this method is to reduce the risk of Theta as much as possible. As the Market is finnicky and can react in ways we don’t want it to, playing long options is essentially you paying extra to have some insurance that if SPY decides to not move for a week or be red, you can hold onto the position when the Market decides to bounce on the upside.
The three biggest cons I can think of with this strategy is that you’re purchasing these calls at a high premium due to them being ITM and far out. That said, the profit growth is slower. Though if you’re playing purely to make profit and nothing else (like me), neither of these matter. What matters seeing these options turn green. So far this method has been fool-proof for me as I’ve held such calls for over a week in the red only to see them turn green as SPY turned bullish.
The third con is that there is always risk to all trades. If we have a bad years like 2001-2003 or 2008, a play like this may not be possible and if you’re already doing this as some really bad news pops. You really need to get out.
I feel like I got too wordy, so I leave this here…
TL;DR - I’ve been buying the dip during corrections/pullbacks by buying SPY calls that are 1-2 months out and a few strikes OTM. Turned $600 into 2.4K profit by doing this within two months. None of my plays had perfect entries and were down -5-10% same day. A week later and they were 20-40% profit. This is all about making gains, not maximizing it.
If anyone wants to ask me a question or even provide better strategies to playing a bull on SPY, I think that beneficial to anyone else who happens upon this thread.