SPX Weekly Option

Bull Call Spread Strategy

Vertical Spread Academy
 Options Trading Disclaimer

• Option Trading can involve substantial risk and is not suitable for all investors.
• The information provided here is for educational purposes only and should not be taken as investment
advice.
• Any decision to purchase or sell options as a result of the opinions expressed in this document will be the
full responsibility of the person authorizing such transaction. Your use of this material is at your own risk.
• Don’t put money at risk you can’t afford to lose. You accept full responsibility for your actions, trades,
profits, and losses.
• The opinions expressed in this document do not guarantee that you will make money or you will not lose
money from the information presented here.
• Past results do not guarantee future results as market environments constantly change. You can lose
money trading options and the losses can be substantial.
 Introduction
Hello,
Thanks for picking up a copy of this SPX weekly option strategy.
I think I should point out that this study was done in late 2017 and I often get questions about how this has done in 2018 and
beyond.
So I decided to put up Patreon page (huh?) to share all of my research in one place where I can update, share, and discuss with
Patrons. I’ll be posting a 2018 version of this strategy very soon. In fact, depending on when you’re reading this, it’s probably
already posted.
So be sure to visit my new Options Trading Research Center to get periodic updates to this strategy as well as new research
studies and strategies posted every month.

Click Here to visit the site and hopefully we can connect over there so talk more about options trading.

Thank you,
J. Eric O’Rourke
 Bull Call Spread (BCS) Characteristics

• BCS consists of two call options with the same expiration where you buy a
lower strike call and sell a higher strike call.
• BCS is a bullish position that profits most if both strikes are in the money at
expiration.
• By selling the a call against the call you buy, you lower your breakeven point.
• By using Delta as a probability of expiring in the money, you can construct
them to be high probability trades.
 Why SPX only?

• This strategy is recommended only for cash settled indexes such as SPX
because we will be selling in the money call options.
• SPX is cash settled and carries no dividend risk so you can let it expire in the
money without fear of being exercised as it is settled in cash and not stock.
• It is not recommended to trade this with SPY or stocks.
• The back testing for this strategy was done on SPX only, so we will focus
specifically on that index.
 Delta as a Probability
• There is a loose but not exact correlation of the option greek Delta with the
probability of an option expiring In the Money.
• For example, an option contract with 7 days left to expiration with a Delta of 72 has
about a 72% chance of expiring In The Money over the next 7 days.
• If you were to look at a Delta 72 option that expires in 30 days, you’ll notice that the
strike is different than the 7 day expiration example.
• That’s because the more time left to expiration, the bigger the possible move in the
underlying.
• This strategy focuses on expirations that are 7 days away, giving us a high
probability weekly income trade.
• We will be choosing the strikes of our Bull Call Spread based on the Delta of the
options that expire in 7 days.
 Options Strategy Back Test Software

• This strategy was back tested using CML Trade Machine.

• Click Here if you’d like to learn more about the software and try it out for
yourself in testing other option strategies.
• The software tests other options trades such as credit spreads, straddles,
and strangles to name a few.
• It also has a variety of ways to back test trading earnings announcements
when volatility tends to pick up, then get crushed.
 Backtest Preface
• The following slide shows the back test results for the past year for buying an SPX
Bull Call Spread (BCS) with 7 days left to expiration using various Deltas.
• The takeaway is that buying a BCS where the sold call has a Delta in the low 70s
produced the best results.
• Remember, selling the Delta 70 option in a BCS has a 70% chance of expiring In The
Money which is how this trade makes money.
• I’m showing you a few Delta results as not all will be available during live trading.
• The software simply rounds to the nearest Delta for the purposes of this back test
but you should see that as long as your sold option Delta is in the low 70s, you
should have a high probability of a profitable trade.
Back Test Using Different Deltas
 Back Test Notes and Takeaways

• On the previous page, the win rate for each Delta combination was slightly higher than the
Delta suggests.
• Possibly because we’re still in a bull market.
• The results could easily change during the next bear market but if you believe in the option
pricing model, it should still be near the 70% win rate as volatility will rise and option
probabilities should adjust accordingly.
• I’d also like to note that there are still a number of losers and it is very possible that you
could experience several losers in a row at any time as the distribution of wins or losses is
not known.
• This makes position sizing extremely important to this or any other strategy.
 Position Sizing Consideration

• It is generally recommended to only risk 1-3% of your capital on any one trade.
Some more conservative traders like to keep it under 1%.
• As an example, if we stick to the 1% method and you were to lose 7 or 8 times in a
row, your drawn down would be less than 10%.
• You need to understand that each weekly trade could be a complete loss of the
price you paid for the spread.
• I’ve back tested using some stops with this strategy but found the results to be
better without using a stop.
• So No Stop, Full Risk needs to be part of your trading plan.
 Sample Trading Plan

• Each Friday near the close, buy an SPX call debit spread that expires in 7
days.
• The sold strike of the bull call spread should have a Delta in the low 70s.
• Hold the spread until expiration as most of the time it will expire in the
money and the spread will increase in value.
• Only risk 1% of your capital on each trade.
 Typical Trade Setup
• In the option chain on the next page, there are 7 days left expiration.
• In this particular week, there is only one call option with a Delta in the 70s which is
the 2415 call option which has a Delta of 74.
• You would want to buy the 2410 call and sell the 2415 call for this example.
• For larger accounts you could widen the strikes by buying the 2400 call instead of
the 2410 for example but still stick with the 1% risk consideration.
• The trade we’re making here is the selling of the Delta 74 call option 7 days out as
there would be about a 74% chance of it expiring “In The Money”
Typical Trade Setup
 Talk to you soon!

I hope you found this SPX trading strategy informative and valuable and are able to incorporate it into your own trading.

If you’re interested in working together on your trading no matter what level you are at, be sure join the Research Center
where we can more easily talk about any option related questions you mat have.

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Thank you,
J. Eric O’Rourke