SPY is short for SPDR S&P 500 ETF (NYSEARCA : SPY) which is a fund that tracks the benchmark S&P 500 Index. SPY regularly appears at the top of daily “most active options” lists. SPY is a highly liquid product and provides reasonable risk/return. More importantly, by day trading SPY options, a day trader is typically not exposed to volatility caused by unforeseen news events that affect the stock market, and can be detrimental to an individual stock’s price – and in turn, one’s options position.
Where to Start- Set Up a Brokerage Account
If you are a day trader, and this includes beginner traders, the following provides a basic introduction on how to set up strategy and services related to trading SPY Options.
First, and most important, you will need to open a brokerage account. Opening a brokerage account is quite straightforward and requires basic personal information. For the best outcome, you’ll want to pick a brokerage firm that specializes in options trading and even one that lets you practice technical analysis and day trading in a real-world stock market scenario, before using your real money. MK Financial LLC highly recommends using TD Ameritrade, which has many useful day trading options and components, including a user-friendly layout and a faster service than other trading platforms.
Why Should I Limit My Day Trading to Just Options?
Why day trade only Spy Options, and not other stocks like Tesla, Apple or Amazon? The key is to stay away from the hype of multiple tickers, when you only need one to make profits. For example, let’s say you can trade just Spy, and consistently make profits. Why would you elect to trade any other stocks? If you stick with just Spy, you are no longer bouncing from one stock or option to another, and being forced to look at many different charts and indicators. If you just trade Spy, your screen will be static and you increase your win ratio. You start to see patterns in the candles. This limits the complexities of day trading, and quite literally keeps things boring. This is a non-greedy approach, and an approach that will lead to consistent profits on a year to year basis.
What Technical Indicators Should You Use to Trade Spy Options?
The question is whether you trade with a naked chart or numerous indicators? There are thousands of indicators that are available to day traders for stocks and options. The reality is that all of the indicators are generally saying the same thing. More importantly, many of the indicators are lagging indicators – meaning they are not based in real time. That makes things complicated, which is not helpful to day trading. The important indicators are real time indicators, which focus on price and volume. Again, the key for day trading Spy Options is to keep things simple. So, what indicator works best for day trading Spy Options? The VWAP is an excellent indicator to use when trading just Spy Options. This is because the VWAP is a real time indicator that is based on price and volume. In reality, this is what the hedge funds use, because it is real time, and based on price and volume. That is it. When you analyze the candles on the charts alongside the VWAP, you have a very simple setup (essentially a “naked” chart) that is not complicated, and is based on real time data related to price and volume.
Drawing Major Supply Zones Are Key to Day Trading Spy Options
In order to day trade Spy Options, you will need to draw major supply and demand zones on your day trading chart. For purposes of this article, it is assumed that the day trader is using TD Ameritrade’s thinkorswim trading program. First, in the five minute chart, after about an hour of trading, you need to identify the point at which the buyers and sellers are agreeing at what price the stock should be sold. This is the point where the candles get to a high point, and then the candle reverses and evens out. This is the maximum amount of profit for the large hedge fund traders, or market makers. At this point, you can create a “supply zone” line, from left to right, at the top of the candles. A good way to draw the zone is to start the zone at the top price, and then lower it ten cents. See the below graph for a visual explanation.
Once you’ve drawn the major supply zone, you can follow the same steps and draw a major demand zone.
See below graph.
These major supply and demand zones should be drawn before any trading of Spy Options is done. The major zones are really the only zones that need to be drawn after the opening bell. Again, less is more, and the idea is to keep things as simple as possible.
Entry Criteria for Day Trading Spy Options
Understanding how to monitor the candles on your chart is critical when day trading Spy Options. The primary candles to consider are the zone candle, the reverse candle and the confirmation candle, which are described in further detail below.
This is the candle that is either coming down to the demand zone, or coming up to the supply zone. The zone candle touches the major supply zone.
The reverse candle is the candle that follows the zone candle, and reverses into the other direction (either off of the supply zone, or off of the demand zone).
The confirmation candle is another candle that confirms the direction of the reverse candle – in others, going in the same direction as the reverse candle. Important Note: The confirmation candle must start outside of the supply or demand zone.
In sum, the above candles are important to evaluate when making trades to buy calls or puts of Spy Options. .
When to Exit Your Spy Option Trade
Once you have evaluated the candles, and made the decision to enter a trade, it is now time to evaluate when to exit. Before entering, you should always have a planned exit. Top day traders do not stay in the market. They plan the trade (including when to enter and when to exit), enter the trade, and immediately begin to evaluate when to exit. It is no different when day trading Spy Options. Once you begin to earn money on the trade, you may want to get out right away. That is perfectly fine. You can also use other indicators to evaluate your planned exit. For example, if you bought a call, and you are watching the candles rise away from the demand zone, your plan could be to sell when the candles reach the VWAP. Another strategy is to identify minor zones, which are similar to major zones, but are smaller zones created within the major zones. Either way, before entry, plan out the exit strategy by evaluating the chart and the primary indicator (e.g., VWAP). In the below graph, a minor zone is depicted by the blue line, which represents a potential exit point from the example trade.
Where to Place Your Stop Loss and Avoid Risk
When it comes to the supply and demand trading strategy, it is critical to know where to place your stop loss. When day trading Spy Options, there are really only two choices – either at the top of the zone or the bottom of the zone. The top of the zone will be if you are taking a more conservative approach. In this scenario, you have identified an entry point, and you enter a trade, but the candles reverse and do not follow the trend that you identified. In the conservative scenario, you exit as soon as the candle comes back down and touches the top of the zone.
In the other scenario, you want to be more aggressive and are, essentially, swinging for the home run. In this case, your stop loss would be the bottom of the zone. This gives you a little more wiggle room to give it that time for it to run backup for positive gain. A lot of the analysis here depends on the trade, the price action and other indicators, such as the VWAP.
Use an Alarm for Day Trading Spy Options
Most people who want to day trade do not want to spend their entire day looking at the screen and monitoring charts. That is really no different than working a 9 to 5 job. Once you have mastered the process of drawing major supply and demand zones in the early morning hours of trading, you should be able to step away from your workstation and tend to other things in life. This is where alarms come in. Most day trading programs provide a tool that lets you insert an alarm when the stock reaches a certain level. You can use this alarm to alert you when the stock is again approaching either the major demand zone or the major supply zone. Once that alarm goes off, you head back to your workstation to evaluate for potential entry points, another chance to earn profits and money on the day.
Summary of How to Day Trade Spy Options
The methods described above provide general concepts on why and how to day trade Spy Options. Following these very core basic principles allows the day trader to lower risk, increase profits and keep day trading simple and boring.
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