Nov 2021: DIA $350 – $351 Bull Call Spread

Stock

DIA

Trade Structure

$350-$351 Call Spread

Trade Date

11/26/2021

Price Paid

$55

Expiration Days

01/07/2022

the 11th 25k Challenge was successfully completed on 12/18.

I still have some trades opened in Nov/Dec which are beginning to close now, so will finish documenting them as they close.

The beauty of ETF trades!

During a correction, 2-4 weeks of trades will get absolutely wiped out, but we save so much cash with this trading method that using it strategically will save you from these events which come unannounced and without warnings. Corrections although brutal bring amazing opportunities with them. You will notice that ETFs like SPY, QQQ, DIA, IWM etc which represent the Stock Market get pulled back and generate trading opportunities during these events. This is the time when you need to deploy enough cash from your portfolio to take on these ETF trades, so that you either cancel out the damage from the correction or come out in a better place than you were before the correction.

THIS IS A DELAYED TRADE FOR EDUCATIONAL PURPOSES ONLY.

To participate in our live challenge and to access our online training, please click “Your Account” and upgrade to the “Live Trader” plan.

Trade Rationale

Markets gapped down big on this day due to a massive knee-jerk reaction on Omicron news. As I have explained earlier, whenever I can lay my hands on ETF like SPY, QQQ, DIA, IWM I prefer them over stocks. These tickers represent the overall market and in a Bull Market, we always get a recovery whether it is a correction or a knee-jerk reaction like this. The only tricky part is that these trades are hard to come by (maybe once in 2-3 months), so whenever they do show up, I make sure that I grab these trades as they always turn out to be winners. You do have to take multiple contracts of these spreads depending on your risk tolerance. I have seen members in our group take anywhere from 6 to 200 contracts of these spreads in their accounts.

DIA_350_351_CallSpreadOpen | Mean Reversion Trading Using Options

Trade Selection Criteria

Overall market movement

Massive knee-jerk reaction and a gap down in the markets.

CHECK

No Earnings or Significant News

N/A – This is an ETF

N/A

Bollinger Bands outside Keltner Channels

Bollinger bands are only slightly outside Keltner Channels but we are at the bottom of our trading range here.

CHECK

RSI Analysis

When you are taking trades on knee-jerk reactions, RSI and ADX are of no use. The only thing to watch out for is support/resistance and price/action itself.

N/A

ADX Analysis

When you are taking trades on knee-jerk reactions, RSI and ADX are of no use. The only thing to watch out for is support/resistance and price/action itself.

N/A

Trade Analysis

The markets went south really quick after taking on this trade and kept selling off until 12/6. We had a minor recovery after that, but got slammed again by another mini-correction on 12/13. Even after going through 2 whipsaws, the trade got closed today for my full profit target. If you had a naked call option on DIA instead of a spread, the Call would have lose almost all its value by now due to Theta Decay. That is why trading spreads is superior to any naked call strategy.

DIA_350_351_CallSpreadClose | Mean Reversion Trading Using Options

Trade Outcome

WINNER

Profit/Loss

$42

Beginning Account Balance

$23,400

Ending Account Balance

$30,000

Grow 00 into ,000 in a year or less (1) | Mean Reversion Trading Using Options

Copy of Untitled | Mean Reversion Trading Using Options

To follow along the strategies we use in the $25K challenge, we recommend that you get the strategy book which explains the whys and wherefores of our method. Get it here=> https://amzn.to/2MUOCE5

2 Comments

Edward Carlson on February 10, 2022 at 10:56 am
Hello,
I really enjoyed reading your book. Very easy to read and the concept is simple yet logical.
You mentioned that you like trading ETF’s, but how do you handle the skew in the indexes? The ATM call verticals don’t give risk 1 to make 1. They are risk 3 to make 2. Do you use OTM spreads to bring the verticals closer to 1 to 1 or do you just accept the higher risk to reward when initiating a trade on the indexes?
- Nishant on February 10, 2022 at 12:04 pm
  Since Index ETFs are high probability trades, you always have to go OTM (instead of the regular ATM spreads that I trade). eg. With DIA at 348, you may be able to grab a 350-351 spread for .60c. Risk 60 to make 40. Need to add enough contracts to make sense out of the trade.