Day trading SPY options is a great way to help you generate income. SPY options are one of the most popular assets to trade, and for good reason. They offer a unique combination of liquidity, flexibility, and price discovery that is unrivaled in the financial markets. However, before you start trading SPY options, there are a few things you need to know. In this article, we’ll go over the basics of SPY options and how to trade them.
What are SPY Options?
SPY options are exchange-traded options that give the holder the right, but not the obligation, to buy or sell shares of the SPY Exchange Traded Fund (ETF) at a specified price on or before a certain date.
SPY options trade on the Chicago Board Options Exchange (CBOE) and are available for trading in 100-share increments.
Why Trade SPY Options?
As previously mentioned, SPY options offer a unique combination of liquidity, flexibility, and price discovery that is unmatched in the financial markets.
Liquidity
SPY options are some of the most heavily traded options in the market, with over 10 million contracts traded per day. This high liquidity means that there is always a buyer or seller available, which makes it easy to enter and exit trades.
Flexibility
SPY options can be used for a variety of different strategies, from hedging a portfolio to speculating on the direction of the market.
Price Discovery
SPY options provide a way to trade the underlying SPY ETF without having to buy the underlying shares. This allows traders to take a view of the market without tying up capital in the underlying asset.
How to Trade SPY Options: Basics
Now that we’ve gone over what SPY options are and why you should trade them, let’s take a look at how to trade them.
When trading SPY options, there are a few things you need to know:
- The ticker symbol for SPY options is “SPX”
- SPY options are priced in 100-share increments
- SPY options expire on the third Friday of every month
- SPY options are American-style options, which means they can be exercised at any time up until expiration
Open Account
To trade SPY options, you’ll need to open an account with a broker, such. as TD Ameritrade, that offers them. Once you have an account set up, you can start trading SPY options just like any other security.
Choose Contract Amount
When buying SPY options, you’ll need to choose the number of contracts you want to buy, as well as your desired expiration date and strike price. Your broker will then execute the trade for you.
If you’re selling SPY options, you’ll need to choose the number of contracts you want to sell, as well as your desired expiration date and strike price. Once again, your broker will execute the trade for you.
Manage Risk
It’s important to note that SPY options are a derivatives product, which means they’re subject to leverage. This means that you can control a large position with a relatively small amount of capital. However, it also means that your losses can be amplified if the market moves against you.
As with any derivatives product, it’s important to trade SPY options responsibly and use stop-losses to limit your downside risk.
How to Trade SPY Options: Advanced
Now that we’ve covered the basics of day trading SPY options, let’s get into some more advanced strategies.
One popular strategy is to buy SPY puts when the market is overbought, and sell them when it’s oversold. Another common strategy is to buy calls when the market is going up, and sell them when it’s going down.
Straddle
One advanced options strategy is known as a straddle. A straddle is an options strategy that involves buying both a call option and a put option with the same strike price and expiration date.
The benefit of a straddle is that it allows you to profit from both a rising and falling market. However, the downside is that it also requires a larger investment than buying just one call or one put option.
Strangle
Another advanced options strategy is known as a strangle. A strangle is similar to a straddle, except that the strike prices of the call and put options are different.
The benefit of a strangle is that it gives you a greater chance of profiting from a move in the underlying security. However, the downside is that it also requires a larger investment than buying just one call or one put option.
Butterfly Spread
Finally, another advanced options strategy is known as a butterfly spread. A butterfly spread is an options strategy that involves buying two call options and two put options with the same expiration date but different strike prices.
The benefit of a butterfly spread is that it allows you to profit from both a rising and falling market. However, the downside is that it also requires a larger investment than buying just one call or one put option.
Once you’ve chosen an advanced options strategy, it’s important to use risk management tools such as stop-losses and profit targets to limit your downside risk and protect your profits. By doing so, you’ll be able to trade SPY options with confidence, knowing that your losses are limited.
Risk Management for Day Trading SPY Options
Now, let’s take a look at how to manage your risk when day trading SPY options.
When trading SPY options, or any derivatives for that matter, it’s important to remember that you’re subject to leverage. This means that your losses can be amplified if the market moves against you.
Stop-loss
To limit your downside risk, you can use stop-losses. A stop-loss is an order to sell a security when it reaches a certain price. This price is typically below the current market price, and it’s designed to limit your losses in the event of a market decline.
For example, let’s say you buy one SPY call option with a strike price of $300 for $5. The current market price of SPY is $310. If you set a stop-loss at $295, your position will be closed automatically if SPY falls to that level.
Profit Target
Of course, you’ll also need to set a profit target in order to take profits off the table. A profit target is simply the price at which you want to sell a security in order to take profits.
For example, let’s say you buy one SPY call option with a strike price of $300 for $5. The current market price of SPY is $310. If you set a profit target at $325, your position will be closed automatically if SPY reaches that level.
Time Decay
It’s also important to remember that options are a wasting asset. This means that they lose value over time as they approach expiration. For this reason, it’s important to trade options with a time horizon that matches your investment goals.
For example, if you’re looking to make a quick profit, you’ll want to trade options with a short time horizon. On the other hand, if you’re looking to hold a position for longer-term capital gains, you’ll want to trade options with a longer time horizon.
Finally, it’s important to use risk management tools such as stop-losses and profit targets to limit your downside risk and protect your profits. By doing so, you’ll be able to trade SPY options with confidence, knowing that your losses are limited.
Summary: Day Trading SPY Options
In this article, we’ve covered everything you need to know about day trading SPY options. To sum things up, remember that:
- There are endless possibilities when it comes to trading SPY options. It all depends on your investment goals and risk tolerance.
- SPY options offer liquidity, flexibility, and price discovery.
- SPY options can be utilized anytime up until expiration.
Once you’ve chosen an options strategy, it’s important to use risk management tools such as stop-losses and profit targets to limit your downside risk and protect your profits. By doing so, you’ll be able to trade SPY options with confidence, knowing that your losses are limited.
To Learn More
We hope you’ve found this lesson on how to trade SPY options helpful. If you would like to learn more, Maurice Kenny has helped over 600 people become financially free through one-on-one coaching, mentorship, and options trading strategy. Many of these new traders are now full-time traders, and they all started by watching his 1-hr webinar.
Feel free to check out other FREE educational resources to help guide you as you begin your new journey to financial freedom.
Also, download a (FREE E-BOOK) by Maurice Kenny, “DAY TRADE LIKE A MILLIONAIRE.”
