How To Make High Probability Trades Virtually Every Single Day (with an 80% probability of profit)

Key Concepts

• High Probability Trades: Trades with a statistically high chance of success, as opposed to random setups.
• Daily Options Expirations: The availability of options contracts that expire every day, allowing for daily trading plans and outcomes.
• Volume Weighted Average Price (VWAP): A technical indicator representing the average price at which a stock has traded throughout the day, weighted by volume. Trading above VWAP is generally considered bullish, while trading below is bearish.
• Delta: An options Greek that measures the sensitivity of an option's price to a $1 change in the underlying asset's price. Crucially, it also represents the statistical probability that an option will expire in-the-money (have value).
• 20 Delta Option: An option with a delta of approximately 0.20, indicating roughly a 20% chance of expiring in-the-money and an 80% chance of expiring worthless.
• Put Credit Spread: A strategy involving selling a put option and buying another put option with a lower strike price, used to profit from a bullish outlook or a sideways market.
• Call Credit Spread: A strategy involving selling a call option and buying another call option with a higher strike price, used to profit from a bearish outlook or a sideways market.
• Hedging/Protection: Buying an option to offset potential losses from a previously sold option.

The Problem with Random Trading

Most traders lose money because they engage in "random setups," believing that more trades equate to more profits. This is fundamentally incorrect. The video emphasizes the importance of filtering out noise and focusing solely on high-probability trades that have a sound mathematical basis. The goal is to differentiate between high-quality trade setups and chasing trades with no logical foundation.

The Advantage of Daily Options Expirations

The advent of daily options expirations has revolutionized trading. Previously, options traders had only one expiration per month. Now, with daily expirations available for many stocks and indices (like SPY, which mirrors the S&P 500), traders can implement simple, daily trade plans. This allows for a known outcome by the end of each trading day, offering approximately 250 trading opportunities per year. Even a small, consistent daily profit can lead to significant annual returns. For instance, a $10,000 account making an average of $20 per day over 250 trading days would yield a 50% return ($5,000). This level of opportunity was not available in the past.

A Step-by-Step Strategy for High-Probability Trades

The video outlines a three-step process for executing high-probability options trades, using SPY as an example:

Step 1: Pick a Technical Indicator

The first step is to select a technical indicator that the trader is comfortable with. The video uses Volume Weighted Average Price (VWAP) as an example.

• VWAP Explained: VWAP is a measurement of the average price at which most shares have been transacted on a given day, weighted by volume. Stocks trading above VWAP are generally considered bullish, while those trading below are considered bearish.
• Calculation: VWAP is calculated by dividing the total dollar volume traded by the total share volume traded for the day.

Step 2: Identify Direction and Sell a 20 Delta Option

Based on the chosen indicator, the trader identifies the market's direction and sells a specific type of option.

• Bullish Days (Stock above VWAP): Sell a 20 delta put option.
• Bearish Days (Stock below VWAP): Sell a 20 delta call option.

Understanding Delta:

• Delta's Role: Delta is a crucial options Greek. It indicates how much an option's price will change for a $1 move in the underlying asset.
• Statistical Probability: More importantly for this strategy, delta represents the statistical probability that an option will expire in-the-money (i.e., have value).
• Example: A 673 put option with a delta of 18.61% has an 18.61% chance of expiring in-the-money. This means there's an 81.39% chance it will expire worthless.
• Strategy Logic: By selling an option with a high probability of expiring worthless (like a 20 delta option, which has an approximately 80% chance of expiring worthless), the seller collects the premium upfront and keeps it if the option expires worthless.

Step 3: Buy a Protective Option (Hedging)

The final step is to buy an option to protect the position against adverse price movements.

• Bullish Days (Put Credit Spread): If a put option was sold, buy a put option with a lower strike price.
• Bearish Days (Call Credit Spread): If a call option was sold, buy a call option with a higher strike price.

Example 1: Bullish Day (November 5th)

• Scenario: SPY is trading above VWAP at 10:00 AM.
• Action:
  • Sell 10 contracts of the 673 put option (which has a delta around 18.61%).
  • Buy 10 contracts of the 672 put option for protection.
• Cash Flow:
  • Selling the 673 puts generated $470 ($0.47 per share * 100 shares/contract * 10 contracts).
  • Buying the 672 puts cost $360 ($0.36 per share * 100 shares/contract * 10 contracts).
  • Net Cash Inflow: $110.
• Broker Requirement: $890 in capital is required, representing the worst-case scenario loss.
• Outcome: SPY sold off towards the end of the day, closing at 67.754. Both the 673 and 672 puts expired worthless because SPY closed above the strike prices. The trader pockets the $110 net cash. This outcome was statistically probable due to the high delta of the sold put.

Example 2: Bearish Day (November 6th)

• Scenario: SPY is trading below VWAP at 67.364.
• Action:
  • Sell 10 contracts of the 677 call option (with a delta of 16%).
  • Buy 10 contracts of the 678 call option for protection.
• Strategy: This creates a call credit spread.
• Cash Flow:
  • Selling the 677 calls generated $390 ($0.39 per share * 100 shares/contract * 10 contracts).
  • Buying the 678 calls cost $250 ($0.25 per share * 100 shares/contract * 10 contracts).
  • Net Cash Inflow: $140.
• Outcome: SPY continued to sell off, closing at 67.027. Both call options expired worthless as SPY closed below the strike prices. The trader pockets the $140 net cash.

Key Takeaways and Conclusion

The video emphasizes that with daily options expirations, it is possible to make directional trades on SPY every day with a known outcome. By selling puts on bullish days or calls on bearish days, and protecting these positions to create credit spreads, traders can target trades where the short option has an 80% or higher probability of expiring worthless (i.e., a 20 delta or less). This strategy offers a significant margin for error, even if the directional indicator is not perfectly accurate. Professional traders leverage their understanding of these probabilities to consistently profit.

The video concludes by inviting viewers to learn more about other option strategies used by professional traders, including income generation and profiting even when wrong about market direction, by clicking a link to a free workshop.