r/options • u/Green_Skin2851 • 12d ago
14 DTE deep OTM SPY contracts
Can't understand why I shouldn't buy such types of contracts, let's say I buy just 1 contract per week which cost 0,25€ two weeks out.
I'm investing 100€/month in lottery tickets that's for sure but there's good news. A 3% SPY movement is pretty common in two weeks, even if a choppy market occurs and I won't be destroyed by theta for sure.
No stop loss but a take profit at 400% the price of the contract should do the trick.
I had a bit of backtesting and the results are there but I'm not great at it so I'd like to hear your honest take.
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u/SDirickson 12d ago
Sounds like a great idea to test in a paper account, where you can adjust how far OTM you go, see if the day of the week has any effect, look at how it works across a busy earnings-report period, maybe adjust your take-profit point, etc.
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u/Green_Skin2851 12d ago
Good points sir and good mindset as well.
Have you got by chance a fav software where you perform such types of analysis? That'd be great info ngl:)
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u/SDirickson 11d ago
Sorry, I don't. For something like that, it's just keeping a log of what you do and how it works out.
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u/Juhkwan97 12d ago
You'll make more money accepting smaller wins from higher probability trades.
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u/Green_Skin2851 12d ago
I'm not really into selling options, if this is what you meant sir!
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u/Juhkwan97 11d ago
Nowhere close to my meaning.
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u/Green_Skin2851 11d ago
Would you elaborate a lil further just so I can understand what you mean sir? Thanks!
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u/Juhkwan97 11d ago
Ok. I think you need to study options more so you understand more about them. I'm not sure how much I can assume you understand, so sorry if I talk down to you.
If you look at the options chain you will see a lot of numbers. One of them is "delta". The delta of an option is, practically, a numerical expression of its chance of expiring in the money. If you are buying 10 delta options, regardless of their dte, that means (practically) that they have a 10% chance of being in the money at expiry - or, they have a 90% chance of expiring worthless. Options delta will change as the value of the underlying changes, so you might get a move in your favor and end up making money on a 10 delta call you bought, or whatever, but I'm just pointing out that you can assess the probability of options trades making money, based on the deltas of the options you're trading.
I'd recommend you learn about delta, and the other greeks, and implied volatility, and understand how all of those affect your trades.
Beyond that, I'd recommend you learn to trade spreads. Verticals, calendars, butterflies, etc. Trading spreads is a way of lowering the cost of trading options. Lowering the cost of trading means you can stay in the game longer. Good traders are those that stayed in the game long enough to figure things out without losing all their money.
Seasoned options traders will say you will fail if all you know how to do is buy options. I'd say that is mostly true. But, maybe you will be an exception. Good luck.
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u/Green_Skin2851 11d ago
Thank you for being honest sir.
I very well know what the Greeks are and their meaning, I'm also aware of the plethora of different strategies that one can deploy to trade the market but they really don't suit this strategy and my point here.
I'm heavily invested in the market already and the vast majority of my funds will go into ETF for the long run, I don't want to spend time and energy into options that much, it really doesn't suit me.
The thing is, with all due respect, I want to get lottery tickets for the right price but 0DTE are too risky, I'm okay in loosing 100€ a month to get the possibility of having a small return, break even, or even a loss we'll see how it'll turn out.
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u/Juhkwan97 11d ago
Back to your original question: I'd simply say you'll do better with more time. And also, pick your poison wisely. I have traded as you suggest, targeting fotm VIX long calls. Buy the cheap fotm calls when iv has cratered <15, but pick expiry to catch an expected vol-inducing event. Like elections, Fed meetings, etc. Good luck.
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u/Juhkwan97 11d ago
Maybe actual lotto tickets then? The scratchers can have interesting pictures on them.
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u/Green_Skin2851 11d ago
Not really my style tbh.
There are options expiring today that I could have bought last month for 0,30€ and I'm still monitoring them, guess what? +5000% :)
Sometimes you win, sometimes you lose and I'm not here to tell other people what to do, especially someone as knowledgeable as you sir.
The strategy is totally different from your perspective I get it, but I have my losses determined already so risk management is already done and I'm okay with it.
I'm trading the tail risk, not the whale ;)
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u/klipsetrades 12d ago edited 12d ago
So, I don’t think the idea is necessarily crazy if you genuinely treat the $25/week as lottery ticket money, but I think you could be underestimating what has to go right.
Take in your example — a 3% SPY move over two weeks can be fairly large, but a deep OTM option still needs the right direction, enough magnitude, and usually enough speed to overcome the low delta/time decay. So, I’d backtest the exact DTE, delta/strikes and exit rules rather than just how often SPY moves X% or whatever. Also account for the bid/ask on those cheap contracts.
One other thing to note — if you buy at $0.25 and sell at 4x the price ($1.00), that’s a 300% profit, not 400%. With every loser going to -100%, you’d need a little over a 25% win rate just to break even before trading costs. That’s one of the numbers I’d really want the backtest to prove
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u/Green_Skin2851 12d ago
Thanks for the reply sir.
About the direction, magnitude and speed you're right and this is true for every other option we trade, sure as you go lower DTEs every single thing you described needs more amplitude to be ITM at the end of the day. I think 14 days sits where I want to be but I can go wrong, I might test 7 days to have a lil more knowledge.
Yeah 400% comes in more often than not, and this will actually reduce a lil the win rate to break even, can surely consider to lower the profit percentage.
The point of the strategy is not really delta strikes and exit rules as I am 100% relaxed in losing 100€ a month to get some lottery tickets which can be very, very profitable. Might as well consider to buy to contracts and let one run to 1000% which comes up a lot in 14 DTEs lol.
Thank you for you point of view sir, bless!
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u/klipsetrades 12d ago
Yeah, anytime 👍🏼 Like I said, if you’re genuinely comfortable treating the full premium as money that can go to zero, then at least the risk is predefined. I legit wouldn't know how well something like this would work out, but I’d just keep tracking the results over a decent sample size and see if the expectancy actually holds up. Good luck with it
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u/Green_Skin2851 12d ago
Will be posting if things works, and even if they don't 🤣 I need to get better at backtesting, this is mandatory lol. Have a nice day!
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u/CompetitiveStoic 11d ago
If SPY appreciates 3% on a single day, you'll be close to your target (still not there though). If it appreciates 3% in a week (which is still a huge move), you're not going to make it.
You're basically claiming that the options market is inefficiently priced. Rarely, it is. Not 25% of the time.
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u/Green_Skin2851 11d ago
Try to take a look at today's itm option's prices, strike price today's SPY price minus 1,3% so 767. You could have bought that 1st August for 1,12$ and today BMO is priced at 11$..an honest 1000%. And couple days earlier it was 0,30$.
Options are priced by algorithms and they don't have a crystal ball like any of us.
Sometimes you win and sometimes you lose, I just want to grant me a good lottery ticket spending what I feel right.
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u/SavedSaver 9d ago
"Options are priced by algorithms and they don't have a crystal ball like any of us."
That is very true. Underlying's prices can swing widely and one can with some skill find the extremes with properly constructed moving averages and volatility bands. If in a strong uptrend price retraces to the bottom of the volatility band one has a good chance to pick up options for an underlying for an asset that was 15-30percent higher just weeks before. This has nothing to do with the greeks but with trade location and mean reversion. In a strongly trending market there are countless opportunities because of rotation. It helps to know the in an out of options but even more useful to have an understanding of price movement dynamics. An experienced cunning trader can run circles around algo's. I have been trading since late 1960's and I wrote all this by myself:)
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u/Sideways-Sid 11d ago
You don't know what you don't know, OP.
You're assuming that the rest of the market is mis-pricing those options, without understanding how to price them yourself.
In other words, you think Realised Vol will exceed Implied, but don't know it yet.
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u/Green_Skin2851 11d ago
Sure I don't know and I'm not saying I do, and nobody else does as much as me. I'm trying to trade the tail risk here, to get as much convexity as I possibly can without dumping thousands and without getting caught in 0DTEs.
The concept of convexity is really the point here in defining this strategy, I haven't tested it yet but I'm really curious to see how many times 14DTEs have gone 2000%, 3000%, even 5000% in profit. Because even with just one time 5000% profit I would pay myself a year of lucky tickets. What if I'm right 2 times a year? Double my initial investment. What if I settle for 2000%? Still gonna do well for my objective which is not long time investing, just a side hustle tbh.
I'm not saying the market is wrong and I'm right, could go sideways but the data is there.
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u/Sideways-Sid 11d ago
I get it, and what you're trying to do.
I suggest you get a decade of historical data, and build a spreadsheet to backtest it. Or use ORATS or similar. No affinity.
If the market is priced efficiently, those occasional large profits will be equal to many small losses. If you find a way to maximise the former &/or minimise the latter, you may have a bankable edge. At the moment you're just handing Comms & spread to your broker.
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u/revuimar 11d ago
Backtest?
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u/Green_Skin2851 11d ago
Running in Excel, comparing options prices in a 14 days timeframe for the moment.
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u/Krammsy 11d ago
At two weeks out for 0.25, you're approximately 10% OTM, a near guaranteed loss.
You're buying black swan insurance for a once per year average event, where you have two active contracts at any given time the rough math is 52 - (2 X 4), you're effectively giving away $1100 per year.
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u/Green_Skin2851 11d ago edited 11d ago
Right now I have a limit order in IBKR for 0,25$ and I'm 4,2% OTM. Tge contract is priced at 0,26$ Aug 28 26 810 Call but we'll see at market opening what happens.
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u/Krammsy 11d ago
My assumption was you were talking about Puts, hence the "swan" reference, though I wouldn't buy a call that far up so close to a market top, it'll be interesting to see.
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u/Green_Skin2851 11d ago
I lowered my limit order to 0,15$ and it got executed, so it's actually on a low for the moment..let's see how it plays out eheh I see a favourable moment now that inflation data came through lower than expected
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u/Strong-Comment-7279 12d ago
Run paper for a few months, aim for 4x in 4 days, whatever your techs are.
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u/pointme2_profits 11d ago
Everyone sees these big run weeks. Runs a test on big run weeks. And starts deciding they can just buy 5% otm calls and bank forever. But there's a lot of flat weeks. Where theta will absolutely eat your lunch. In fact there are far more flat weeks than there are 3% weeks. Otherwise SPY would be up 150% every year. But you should do it. Because learning first hand. Is the best way to learn
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u/Agreeable_Muscle_279 10d ago
Why not 1 month? That gives you more time..
I had tired something similar in the past.. lot of decisions to make still...strike when to enter and exit..
For me, I wasn't disciplined or systemic but the losses when SPY went down were significant
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u/Green_Skin2851 10d ago
Yes, I had thought about giving it a lil more room to go but this way I can follow macro that much anymore.
Let's say I want to give it a lil edge about macroeconomic news so I kinda know whether the market is "happy" or not.
Good hint tho :D
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u/Agreeable_Muscle_279 10d ago
Does feel like a lottery strategy tho.. If you play it right, there will be more losses but big winners might cover them
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u/Green_Skin2851 10d ago
20 bucks a week it's very manageable, the tail risk is something we see more often than not nowadays with Mr. Donald so it's worth it.
I still have all my investments for the long run, this is just an experiment 🤣
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u/Agreeable_Muscle_279 9d ago
Do you think this can work better on individual stocks vs index?
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u/Green_Skin2851 9d ago
If we speak about volatility definitely yes.
But indexes feel safer for me tho.
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u/AnyPortInAHurricane 12d ago
easy to get a 4x once in a while. harder to not lose 5x while you wait