CSP IX: WEek 2 of 1% 5DTE ETF TRades

It’s the weekend, so time to put on new trades for next week. If I were trading this strategy full-time I’d have on at least 10 positions, so that none was more than 10% of my portfolio. Trade sizes less than 5% are even better, but for purposes of this experiment I’m going to back down to 5 per week. Not because putting on the trades takes much time, but because writing about them does.

So to get started, I went to my Barchart watchlist of ETFs with weekly options, then selected the Performance Chart View, with the 1-month lookback selected (I used “5-day” last week). Here’s how that list looked on 9/24/22:

Note the 1-month percent change on those; do you wish you’d been in any 1 of them the past month? Me too, but hindsight is 20/20. Let’s look at how diverse these are: semiconductors, small caps, NASDAQ, biotech, S&P500, gold, financials, gold again, S&P again, and finally, the VIX. The first 7 tickers are in different sectors or market segments, so if I pick 5 of those I’ll be mostly diversified. But if I end up going farther down the list I wouldn’t want to pick gold twice, or the S&P twice, but at least those tickers give me choices to look at if I get down that far.

So what’s next? We ask if they’ll return 1% at <30 delta. Here’s the 30Sep Put option chains for the first 3 tickers:

Can you look at those now and choose which strike to sell? In the first one, what’s the Midpoint of the 51P? Add 0.35 & 0.65 to get 1.00, then divide by 2 to get 0.50. And 0.50 is a bit shy of 1% of the 51 strike. So the 51.5P will work, that’s almost a given, but check it anyway: (0.40 + 0.80)/2 = 0.60, which of course is >1% of 51.5. And that’s way down at 11Δ, a nice place to be.

But now let’s do something I didn’t do at the front-end of last week’s trades. The commission to sell this put is 0.0066, and to buy it back at the end is another 0.0066, which adds up to 0.0132, or 1.3 cents. So round that to 2c and subtract 0.02 from Midpoint, and if that’s still >1% of the strike, then choose that strike. In this case then, 0.60 – 0.02 = 0.58, and that’s still >1% of the 51.5 strike.

And something else I didn’t do last week: check the price history, and see how the strike looks in relation to that. The 1-month chart for SOXS:

Pretty steady upwards, which looks good. Starting from 13Sep, that long flat section is at about 51; sometimes as low as 50, sometimes as high as 55. That looks good to me, because that should act as “support” for the 51.50 put we’re going to sell. I’m not a fan/believer in “technical analysis,” and I don’t use moving averages, MACD, Bollinger bands, or any of that, but I DO think there’s value in looking for near-term support levels, like $50-51 seems to have been for SOXS in that week or so from 13Sep until that 1-day drop before the 2 up-days at the end.

But even more important to me is, how much does this ticker go down when it drops? Look at that trough before 13Sep, that’s Friday & Monday, 9/9 to 9/12. Now go back to where the price was on 9/8, that was about 50. And the trough is at about 45, so that’s a drop of about $5. But go back in time up that hill to just above the “6” in “Sep 6”: that’s about 54, making the decline from there to the 2-day trough about $9.

So now I ask, “If SOXS dropped $9 from 63, would the trade be okay?” And the answer is Yes, because that would take it to 54, and our strike is 51.5. However, it might be better to think, “That drop of $9 from 54 was almost 17%, so what does a drop of 17% from the current price of 63 look like?” Losing 17% leaves 83%, so 0.83 * 63 = about 52. So the 51.5 strike looks safe from the biggest few-day drop this ETF has seen in the last month. I feel really good about this trade.

Go back up to the TZA put chain in the middle. Work out which strike to choose before reading on.

The 38.5 won’t work because the Ask of 0.37 is <1%, and there’s no way it would sell above that. Midpoint of the 39P is 41 (it’s really 41.5, but round down to the Bid side), and that’s >1%. But subtract the 2c in trade costs, and we should net 0.39, exactly 1% of the strike. That’s at 13Δ, a nice place to be, but if you wanted to sell the 39.5P at 15Δ for 0.50, I wouldn’t have a problem with that. So now, how does the chart look?

VERY similar to SOXS, from the trough at Sep 9th & 12th, to the hump at 6Sep. From that hump, ~$38, to the lowest part of the trough, close to $32, is $6. But that’s 16% down from 38, so applying that to 45.32, TZA isn’t likely to drop lower than about 38. But notice that the strike I selected is 39. Would I want to take this trade? I’m not sure now. Would I want to go up to 39.5, 2 deltas closer to the money? No. So let’s mark this one as “maybe” for now, and see what the other trades offer.

The third option chain above is SQQQ, and I’d choose the 49P at 14Δ for 0.58 (for calcs, lean toward the Bid side if the spread isn’t an even number; but feel free to try for a better fill, like 0.59 ). The chart looks very similar to the last two, and I calculate the lowest potential drop to be to 47, which is $2 below my chosen strike. So I’ll give this one a “maybe” for now and move on.

LABD I’ll take the 21P at 9Δ for 0.25. Good support at 22, and potential drop to 21.

SPXU I’ll pass on. The 18.5P at at 16Δ goes for 0.19, which is <1% when I deduct 2c for trade costs. And moving up a strike, the 19P at 23Δ for 0.31 is solidly 1%, but the delta is kind of high. But what killed this one for me is a potential drop to about 17.60, well below the 18.50 strike, so I don’t like those odds.

JDST gets a pass for now. 14.5P at 13Δ for 0.20, with good support over the past week at 14 or better, generally 15. But I estimate the potential 1w drop (based on price action from 6Sep to 12Sep) to be to 13.50, which is $1 below the 14.5 strike.

FAZ 25P at 15Δ for 0.27 I’ll pass on because support is at about 24.

DUST is another gold ticker, let’s see if it looks better than JDST did. The 24.5 at 13Δ is priced at 0.30. Good support at 25, and a theoretical price drip to maybe 24.20. Close enough, I’ll take it.

SDS is another “short” S&P500, like SPXU which I passed on earlier, so I can consider it. I had to go up to the 49P at 24Δ for 0.55 to get 1%, so I already don’t have high hopes about support above that level. And nope, support is at 47. Pass.

UVIX 10.5P at 14Δ for 0.17 would work. Good support at 10, but more often at 10.50. Calculated max price drop to 10.40, so I’ll take it.

Now I have to go back to my Barchart watchlist because I’ve gone through the 10 in the screenshot above, but have only selected 4. The next 2 are VIX tickers, like UVIX that I just chose, so skip those.

SARK 58P at 21Δ for 0.67, but support is down at about 56.

TBT 29P at 27Δ (note how high, compared to the others) for 0.33 has support a week back at 29, and shouldn’t drop lower than 29 based on recent drops, so I’ll take it.

So now I have 5 trades for next week: SOXS, LABD, DUST, UVIX, TBT. I’ll put the orders in tonight at Midpoint because I’m able to check on them when the market opens, and if any don’t open for Mid I can lower to the Bid as long as the 1% return is still there.

I’m going to start something new this week too: the 1 trade of those 5 that I like the most (SOXS) I’ll open in my real-money IRA. That’ll give me skin in this game, AND allow me to compare fills between paper-money and a real account.

Because to be truthful, I’ve been misled before by how TDA’s Paper Money account works. I had a method of selling strangles at 10Δ on each side that was absolutely killing it, doubling every month or two, but when I moved that strategy to real money it didn’t do anywhere near as well. So this way I can compare fills on that one ticker between the two accounts. If it looks like these 1%/wk 5DTE CSPs “work” in real money, then I’ll start doing more trades there, until eventually all these kinds of trades are with real money.

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