Subject: A strategy I read about
I wanted to share a strategy I read about.
Leveraging Options for Enhanced Returns: A Strategic Overview
In the realm of investment strategies, a particularly intriguing approach involves the use of options to potentially amplify returns compared to directly investing in the SPDR S&P 500 ETF Trust (SPY). This method, which we might have touched upon briefly, warrants a deeper exploration for its innovative use of Deep In-The-Money (DITM) call options.
The Core Strategy with Call Options

Rather than purchasing SPY shares outright, this strategy advocates for buying a one-year DITM call option on SPY. Key to this approach is selecting an option with a delta of one, ensuring that for every $1.00 movement in SPY, the option's value also adjusts by approximately $1.00. The target strike price is about 60% of SPY's current share price, with the aggregate cost (strike price plus premium) ideally less than 1% above SPY's trading price, minimizing the time value.
Entry and exit points are dictated by moving averages: enter when the 10-day moving average exceeds the 200-day moving average, and exit upon the reverse. As SPY appreciates, the strategy involves "rolling up" the option to capture gains, and "rolling out" to a new one-year option around 30 days before expiration. This maneuver aims to leverage market upswings, potentially tripling the returns of SPY.

Adapting to Market Downturns with Put Options

The strategy extends to bear markets, triggered when SPY declines by 20% from its peak, reflecting a shift to more defensive trading postures. Here, the focus shifts to DITM six-month put options on SPY, mirroring the call option strategy but inverted for bearish conditions. The entry signal is a MACD histogram below -0.5, with an exit signal above 0.5. Re-entry criteria include the 10-day moving average trailing the 20-day, alongside a MACD histogram below -0.5, the market being 20% or more below its high, and spy being below the 200 day SMA. 10-day moving average trailing the 20-day ensure responsiveness to bear market volatility.
Risk Management and Potential Outcomes

While the strategy is designed to magnify gains, it's not without risks, including the possibility of being "whipsawed" by rapid market reversals. However, the structured entry and exit signals, combined with strategic rolling of options, aim to mitigate these risks, potentially leading to significant gains over losses, as suggested by the referenced strategy.
This dual-faceted approach, integrating both call and put options based on market conditions, embodies a sophisticated strategy to navigate and capitalize on market dynamics. As with all investment strategies, due diligence and a clear understanding of associated risks are paramount.
Thoughts appreciated.